Domestic reverse charge VAT for construction services

Domestic reverse charge VAT for construction services

The Domestic Reverse VAT Charge for Building and Construction Services (DRC) came into force on 1 March 2021. HMRC has published legislation and guidance on this regime, which will require the recipient rather than the supplier to account for the VAT due on certain construction services.

The administrative and financial consequences for businesses affected by the regime need careful management.


The aim of this measure is to combat missing trader fraud in the construction sector in a similar way to the previously introduced domestic reverse charges for the sale of computer chips and mobile phones.

Under these rules, a VAT-registered business, which supplies certain construction services to another VAT-registered business for onward sale, will be required to issue a VAT invoice stating that the service is subject to the domestic reverse charge. However, it is the recipient that must account for the VAT due on that supply through its VAT return, instead of paying the VAT amount to the supplier. The recipient may recover that VAT amount as input tax, subject to the normal rules.

Unlike other types of reverse charge the value of such reverse charge services will not count towards the VAT registration threshold, which is good news for smaller businesses.

Which services does it apply to?

The domestic reverse charge applies to supplies of ‘specified services’ between VAT registered businesses where the recipient then makes an onward supply of those specified services. Specified services are generally services that are defined as construction operations for purposes of the Construction Industry Scheme (CIS). Read how the CIS works.

The DRC applies to a very broad section of businesses involved in property development, even those who may not typically consider themselves to be construction companies. Not sure if the DRC applies to your businesses, find out using HMRC’s decision tree

Among those included are construction, alteration, repair, extension, painting and decorating, plus the demolition of buildings, civil engineering and the installation of heating, lighting and air-conditioning. The legislation is designed so that if there is a reverse charge element in a supply then the whole supply is subject to the domestic reverse charge. 

Where specified services have been provided then subsequent services on the same site by the same supplier may also be covered by the domestic reverse charge, if both parties agree. This rule introduced to speed up the decision making process on whether the domestic reverse charge should apply. However, where the original services did not come within scope of the domestic reverse charge but subsequent services do, then the VAT treatment changes, therefore, businesses have to review and monitor the VAT position throughout a project.

Some services do not fall within the scope of the domestic reverse charge; however, where there is a reverse charge element in a supply then the whole supply may be subject to the domestic reverse charge. 

The domestic reverse charge applies to specified services unless:

  • The services are supplied to an end user, such as the property owner, or directly to a main contractor that sells or lets a newly completed building
  • The recipient makes onward supplies of those construction services to a company connected with the end user
  • The recipient is not VAT registered, or required to be VAT registered
  • The recipient is not registered for the CIS
  • The supplier and recipient are landlord and tenant or vice versa, or
  • The supplies are zero-rated.

An 'end user' is a person who receives the specified services for any purpose other than making an onward supply of those services. Where the customer has not provided confirmation that it is an end user either in writing, an email, or in the contract, HMRC’s guidance is that the supply will come within the scope of the domestic reverse charge and no VAT is charged. If your customer doesn’t provide confirmation that it is an end user it cannot be treated as one. HMRC have indicated that a Customer can ‘opt’ not to be treated as an end user. This could create a significant cash flow advantage for the Customer; however, it is not specifically reflected in the Guidance or Legislation and therefore a Customer should proceed with caution, take advice and if appropriate obtain a ruling on this point from HMRC before adopting this approach. In addition to confirming if your customer is an end user, a supplier should also require them to confirm their VAT and CIS status and provide their VAT number. We recommend that this is confirmed in the contract before any invoices need to be raised.

Recipients of construction services who are not currently deemed contractors for CIS purposes also need to be aware of changes to the CIS rules from April 2021 – more businesses may be within the scope of CIS, and therefore potentially have to apply the domestic reverse charge.  

Where goods and building materials are provided together with construction services and in the course of the construction work then the reverse charge also applies to these goods. There are likely to be cases where it is difficult to determine if there is a separate supply of goods that is excluded from the reverse charge, or whether they are to be included as part of a single supply of construction services.  In these cases, a business must consider the position further to ensure the correct VAT treatment.

Where the reverse charge would ordinarily only apply to 5% or less of the value of the whole supply then it is possible to potentially disregard the reverse charge and apply normal VAT rules. 


Invoices for services subject to the domestic reverse charge must include all the information required on a normal VAT invoice. Including how much VAT is due under the reverse charge or the rate of VAT, if the VAT amount cannot be shown. However, they must make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT. There is no specific wording but HMRC provide examples of suitable wording:

“Reverse charge: VAT Act 1994 Section 55A applies”

“Reverse charge: S55 VATA 94 applies”

“Reverse charge: Customer to pay VAT to HMRC”

Where customers issue authenticated tax receipts or self-billing invoices HMRC’s recommended wording is:

“Reverse charge: we will account for and pay the output tax due to HMRC” 

“Reverse charge: as the UK Customer we will pay the VAT due to HMRC”

Impact on construction businesses

Construction businesses are recommended to ensure their accounting systems are capable of processing reverse charge supplies and make ongoing checks to ensure that supplies and purchases are correctly treated. As the VAT amount must still be shown on invoices subject to the domestic reverse charge, there is a risk that suppliers will account for the VAT to HMRC in error and customers will recover it from HMRC.    
Subcontractors that relied on VAT collected from their customers as working capital until they have to remit it to HMRC are likely to suffer from the loss of cash flow. These businesses and even their customers should consider if payment terms need to be revisited to avoid problems in the supply chain.

Subcontractors should also confirm that they are working for a VAT registered business and whether they are working for an end user, or for someone connected to an end user, including landlords and tenants.

What action should construction businesses take?

Construction businesses should:

  • Review supplies made to and received from other VAT registered contractors to establish where these will be subject to a reverse charge from 1 March 2021
  • Obtain notification from customers that they are an end user and confirmation of their VAT registration and CIS status, without notification that they are an end user they must be treated as though they are not an end user
  • Consider the impact on cash flow after 1 March 2021 and if there are any other ways to mitigate this
  • Consider whether it is appropriate to move to monthly VAT returns if  no longer a net payer of VAT.
  • Cease the Cash Accounting Scheme if supplies fall under the DRC
  • Review the suitability of the Flat rate scheme for your business
  • Consider whether it is appropriate to arrange for suppliers to purchase goods and materials where their services to you fall under the DRC to alleviate the need to fund VAT payments on the goods and materials.

Your next steps

For more information on this development and any other VAT issues affecting construction, land and property, get in touch with your usual BDO contact or one of our VAT specialists shown above.

Print or Share


See also this recording of our BDO webinar on the new domestic reverse charge regime for construction services.


Download - Practical Steps to Improve Cash Flow for Construction Firms