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Business Tax  •  VAT

Construction industry update: Clarifying the DRC (Domestic Reverse Charge) rules

By RJP LLP on 28 June 2022

The new Domestic Reverse Charge (DRC) rules for the construction industry came into effect on 1 March 2021 and ever since confusion remains over whether the required DRC conditions have been met.

DRC rules should only apply when all five of the qualifying conditions below are met:

  1. Supply is a specified service within the scope of the Construction Industry Scheme (CIS)
  2. Supply is standard rated or reduced rated
  3. Customer is (or should be) VAT registered
  4. Customer is CIS registered
  5. Customer is making an onward supply.

If any one of these five conditions are not met, the reverse charge ruling does not apply. Instead, VAT should be charged by the supplier as normal.

What happens if DRC does apply?

If all five criteria are met and the reverse charge does apply, the supplier should not charge VAT on their invoice.

Instead, the customer needs to declare the VAT themselves, by including it in box 1 on their next VAT Return.

VAT can be recovered by them in box 4, subject to the normal rules.

What happens if VAT is incorrectly charged?

It is very important to understand the ‘5 qualifying conditions’ and ensure that the DRC rules are correctly followed.

If VAT has been charged incorrectly, there is a risk to the customer that HMRC will disallow recovery of the VAT paid out.

If VAT is not charged and should have been, there is a risk to the supplier that HMRC will raise an assessment to review how VAT was undercharged.

Suppliers of construction services still need to establish the correct VAT rate to be applied to a transaction, even if they don’t need to report this to HMRC directly. If the customer is already VAT registered this is straightforward but if not, and the customer should be, the situation is trickier.

If this situation arises, our advice is to ask the customer to confirm in writing that they are not VAT registered and also, that there is no requirement for them to be VAT registered. Then, if HMRC questions any records in the future, evidence is available to demonstrate you have acted in good faith and completed the necessary checks.

Is the supplier registered for CIS?

The same principle applies to CIS registrations and the supplier needs to rely on information provided by the customer, so obtaining a written declaration is advisable. It is also possible to verify CIS registrations online.

Identifying the end customer

The reverse charge rules only apply where the customer has notified the supplier that they are NOT the end user or an intermediary in relation to the supply. If this is not the case and they are the end user or intermediary, the reverse charge will not apply and suppliers should charge VAT.

Therefore, it is important to be clear about the status of the customer and have a clear line of communication between each party. Ensure that all discussions are documented and collect appropriate evidence to back up any future information requests from HMRC.

Which services are caught by DRC?

The most ambiguous condition when it comes to implementing the DRC rules relates to ‘specified services’. In theory it should be straightforward to judge this because HMRC provides a list of specified services, but what happens when the activities do not easily fit into a category description?

Rather than rely on the VAT guidance, a more helpful resource is HMRC’s CIS guidance. This includes a detailed list of different types of work and also clarifies whether the activity is caught by CIS.

VAT is complicated and especially when it comes to the construction industry and complying with the DRC rules. If you would like some help with your VAT returns, please contact us via

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