What is the Domestic Reverse Charge?
The DRC shifts the responsibility for accounting for VAT from the supplier to the customer for certain construction services. Rather than charging VAT on your sales invoice, you state that the service is subject to the reverse charge and the customer (if also VAT and CIS registered and not an end-user) accounts for the VAT themselves.
Key points:
- Applies to most B2B supplies of labour and materials, if both parties are VAT and CIS registered.
- Does NOT apply to end-users, non-VAT registered customers, or purely zero-rated works.
- The supplier issues an invoice without added VAT, clearly marking the “reverse charge” statement.
Common Mistakes and How to Avoid Them
1. Misidentifying End Users
DRC does not apply when supplying the “end user” (usually the actual property owner or developer using the completed work themselves). Mistakenly charging or omitting the reverse charge can lead to under- or overpayment of VAT and headaches for both parties.
Best practice:
Always obtain a written confirmation of “end user” status before invoicing.
2. Incorrect or Missing Invoice Wording
Invoices must include specific wording, such as:
“Reverse charge: customer to pay the VAT to HMRC.”
Forgetting this statement, or charging VAT in error, causes confusion and invites HMRC scrutiny.
Tip:
Update your invoicing templates and train staff regularly.
3. Cash Flow Surprises for Subcontractors
Since you no longer collect VAT on DRC invoices, cash flow may tighten. Plan accordingly—especially if you were previously using VAT receipts to bridge working capital gaps.
4. VAT Returns and Record-keeping Errors
- Suppliers must show the value of DRC sales (excluding VAT) in box 6 of the VAT return.
- Customers declare the VAT as both output tax (box 1) and, if reclaimable, input tax (box 4).
Failure to record correctly results in inaccurate filings or missed reclaim opportunities.
Practical Tips for 2025
- Confirm customer and project status before every engagement.
- Maintain up-to-date CIS and VAT registration details for all counterparties.
- Double-check software compatibility: Ensure your accounting platform handles DRC correctly, flags qualifying transactions, and includes the mandatory invoice notice.
- Conduct DRC training annually for all finance and site admin staff.
Summary Table: DRC At-a-Glance
Step | Supplier | Customer (Contractor) |
|---|---|---|
| Is DRC eligible? | Verify with customer | Confirm supplier status |
| Issue invoice | No VAT, add DRC statement | Receive invoice, pay net only |
| Record VAT | Nil VAT due to HMRC | Account for & reclaim VAT |
| File VAT return | Report in box 6 only | Add to box 1 & box 4 |
Final Thoughts
The construction reverse charge regime is here to stay. With HMRC actively monitoring compliance and penalties for mistakes, now’s the time to tighten your processes. Regularly review customer statuses, update invoice practices, and invest in training. You’ll minimise the risk of costly errors and keep your cash flow and compliance on a firm foundation.
#Construction #UKVAT #ReverseCharge #CIS #TaxCompliance #2025
Sources: HMRC CIS & VAT Notice 735, ICAEW, AccountingWEB, sector VAT advisers