VAT Reverse Charge

Concerns have been expressed by The Federation of Master Builders and Businesses themselves about implementing the new CIS VAT rules referred to as the Domestic Reverse Charge (DRC). Originally due to be introduced on the 1st October 2019, DRC will finally come into effect on the 1st March 2021 following further delays due to the impact of Coronavirus. 2021 will be the year we have to understand and get to grips with this new VAT structure for the Construction Industry.

The Domestic Reverse Charge is going to change the way VAT is collected and its impact will be felt right through the Construction industry. In Building terms it’s when the Architect turns up on site with new drawings which means the wall you built the day before has to be moved.

DRC will only apply to individuals or businesses registered for VAT and the Construction Industry Scheme in the UK.

It will affect both Contractors and Sub-Contractors, have a look at the Flowchart below to see the impact on you as an individual or your business.

In Preparation for the 1st March 2020

  • Identify which part of the new legislation applies to you or your business.
  • Understanding the impact of Cashflow. (Read our blog here to see the direct impact on you).
  • Make sure your accounting systems and the software you are using is the most up to date available.
  • Contact suppliers and customers in writing to acknowledge that you are aware of the changes of DRC.

Why have HMRC introduced the Domestic Reverse Charge?


The new Legislation is an anti-Fraud measure to remove the opportunity of Organised Criminal Gangs to create new companies and steal VAT by reclaiming large amounts of input tax then disappearing before making any sales.

You or your business may have noticed that any large refunds of VAT over the last few years have been subjected to a VAT check before funds have been released. This is also part of the ongoing battle against fraud.

Missing Trader fraud is projected to have cost the government £140m in 2020/21.


HMRC want to avoid fraud issues by collecting any VAT due from the Main Contractors only. The VAT liability moves from the subcontractor, which will mean they no longer charge VAT on the invoice to the middle/main contractor. The middle contractor continues the same process as the subcontractor passing the liability onto the main contractors. The Main contractor is the end of the chain and only at this point will an invoice be raised which includes VAT. The Contractor charges this to the customer and pays the VAT due over to HMRC.

All this in HMRC’s opinion will result in less VAT disappearing.


HMRC understands that implementing the new legalisation may cause some problems and have indicated they will apply a very light touch in dealing with any errors which may be made while getting to grips with the new rules.

Penalties will however be enforced if you are deliberately trying to take advantage by not accounting for VAT correctly.


Cashflow is going to be an important part of the new process, especially for the Subcontractor right at the start of the chain. The 20% VAT which was previously collected on behalf of HMRC and used to help with cashflow before paying over the VAT to HMRC will disappear and provide potential liquidity problems for individuals and businesses.

One suggestion to ease these concerns would be to complete monthly VAT Returns. The switch to monthly returns may mean your business receives VAT refunds due to no VAT on sales and claims made against vatable expenditure.

Gross CIS is another option to aid cashflow. If you qualify for the scheme, the 20% CIS deduction is not applied which enables you to retain the money within the business to combat the 20% VAT loss and help with Cashflow.

The Middle Contractor has the most important role within the process. They are vital in keeping the DRC process working by recording information correctly and applying the new rules. No VAT is claimed from the Subcontractor or applied to sales to the Main Contractor which potentially has cashflow consequences for the middle contractor.

The Main Contractor will apply the DRC rules for invoices received from the Middle Contractor and not reclaim any input VAT as none will have been charged. VAT will be invoiced to the end Customer and the Main Contractors are responsible to paying over the output VAT charged to the customer that has been deferred from the Subcontractor at the start of the process. The challenges the Main Contractor will face are, that without the necessity to reclaim any input VAT on Middle Contractor invoices, larger VAT Payments will need to be made to HMRC at every VAT period end.

For more information on the direct effects of the DRC process on contractors and sub-contractors, read our blog here.

Separate Contracts & Invoices for Labour and Materials

Supply and fix works will also be subject to the DRC rules if the work is provided at the same time and at the same site as the supply of materials. The supply of labour and materials qualifies as a single supply for VAT purposes. Sending separate invoices to the same supplier split between labour and material will not remove the material element from the reverse charge. Please see below for an example of the DRC invoices.


The new rules do not apply to all sales and purchases between Main Contractors and Subcontractors. The exclusions include transactions falling into the following categories:

  • Non-VAT Registered Businesses.
  • Zero rated Goods.
  • Partial Exemption.
  • Flat rate VAT.
  • Cash Accounting (Treat as invoice accounting on the DRS).


The new rules will take a little time to get used to. However, WDS are here to help you understand your responsibilities under the new system and help you overcome the potential issues highlighted above. If you are in any doubt or need any assistance, please do not hesitate to contact your usual WDS contact.

Flowchart –


Example Invoice –