Domestic Reverse Charge - changes to VAT for the construction industry

Posted by tomkirkham - September 10, 2019 8:54 am VAT – the Domestic Reverse Charge for construction services.

For a further update to VAT and CIS please read our latest blog post.

Update 5 June 2020

HMRC have issued their Revenue and Customs Brief 7 (2020) document which set out a further six month delay, due to the impact of Covid-19, to the Domestic Reverse Charge (DRC) which affects the treatment of VAT for construction services. The introduction will now take place on 1 March 2021. This is an additional six month delay from the original planned date, of 1 October 2019 which was delayed to 1 October 2020 as a result of Brexit. The total delay to this policy, once implemented, of 17 months.

Update – 9 September 2019

Changes to the way VAT is accounted for in the construction industry, with the introduction of the “Domestic Reverse Charge” (DRC) were originally planned to come into effect from 1 October 2019.

However industry experts have successfully lobbied Parliament over concerns that some businesses will not be ready to implement this change in time. The government has made the decision to postpone the introduction of the Domestic Reverse Charge (DRC) for a further year with the new deadline being 1 October 2020.

Our blog below has been updated to reflect this and provides information about what these changes will mean and who is affected.

Warning of changes from 1 October 2020

From 1 October 2020 there will be a significant change to the way VAT is accounted for in the construction industry, with the introduction of the “Domestic Reverse Charge” (DRC) affecting certain supplies of construction and building services.

Combating trader fraud

The change is being implemented as a measure to prevent missing trader fraud committed by subcontractors providing labour for construction services. This type of fraud occurs where a subcontractor provides labour to the main contractor, and charges VAT on this supply, but “disappears” before paying the VAT over to HMRC. Under the new system, the subcontractor would not charge VAT on its supplies to the main contractor – it would instead be accounted for by the contractor, by way of a reverse charge.

Who is affected?

The DRC applies to businesses in the chain of supply of construction services, where both the supplier and the customer are VAT registered. Construction services are defined as services falling under the long-running Construction Industry Scheme (CIS), so will be familiar to most businesses operating in the industry.

The supplies covered include most construction work such as:

  • Groundworks.
  • Demolition.
  • Building work.
  • Installation of heating and lighting systems.
  • Painting and decorating.
  • Cleaning the inside of buildings after construction work.


The following are examples of activities excluded from the definition of construction services:

  • The professional services of architects or surveyors.
  • The installation of security systems.
  • Carpet fitting.
  • Delivering materials.

End users and other exclusions

Supplies to “end users” are excluded from the DRC. End users are businesses that receive building and construction services, and have to report its payments for these through CIS, but do not supply these services alongside other building and construction services.


As an example, a retail business spending more than £1m a year on the construction of retail units for its own use, is classed as a “deemed contractor”, and has to include such payments through CIS returns. They would however be classed as an end user and would be excluded from the DRC, because they are using the construction services for themselves and not selling them on. In this situation, the supplier of construction services would need to charge VAT on its supplies as normal.

What you need to do

End users should be writing to their suppliers to make them aware that end user status applies. If a business wrongly claims end user status then they will still be liable for the output tax that should have been paid, and penalties may also be applied.

There are also exclusions for certain scenarios with supplies to connected businesses, or where the supplier and recipient are landlord and tenant, and the DRC does not apply to zero-rated construction services nor services supplied to a customer who is not registered for VAT.

How it will work in practice

When making a supply to which the DRC applies, suppliers must show all the information normally required to be shown on a VAT invoice, and annotate the invoice to make clear that the domestic reverse charge applies and that the customer is required to account for the VAT. The amount of VAT due under the domestic reverse charge should be clearly stated on the invoice but should not be included in the amount shown as total VAT charged.

The business receiving the supply of services to which the DRC applies, will need to account for that VAT amount through its own VAT return instead of paying the VAT amount to its supplier. It will be able to reclaim that VAT amount as input tax, subject to the normal rules.

Subcontractors supplying services under the DRC may need to consider the impact to their cashflow. The opportunity to use VAT as working capital between the time it is received from the customer and the time it is paid over to HMRC will no longer exist.

Contractors will no longer suffer a delay between paying out VAT and recovering it, since both will now be dealt with on the same VAT return

How we can help

Clearly, the new rules may take some getting used to. HMRC have indicated that they will operate a light touch on genuine mistakes and penalties for a period when the new rules are implemented. However, we would recommend that the possible impact on your business is looked at as soon as possible, so that action can be taken where necessary.

We can assist with the implementation of the Domestic Reverse Charge rules, including matters such as:

  • Helping to assess whether your business will be affected.
  • Assisting with the completion of VAT returns where the DRC applies.
  • Ensuring your systems enable you to remain compliant with the DRC.

Whilst there is a year’s delay to this introduction we still advise business in this sector to start planning for this change. If you need help with the Domestic Reverse Charge, or any other matter, do contact your local MFW office.