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A Complete Guide on Domestic Reverse Charge (DRC)

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To tackle the prevalent VAT fraud in the construction sector, the government introduced Domestic Reverse Charge (DRC) rules with effect from 1 March 2021. Under the domestic reverse charge (DRC) rules, as name suggests, the customer instead of the supplier is liable to account for and pay the VAT to HMRC. 

For example, Developer Ltd is constructing an office building and uses Construct Ltd as builders to carry out the work on the construction site. The agreed total price for the contract is £100,000. On usual case, Construct Ltd would have issued invoice of £100,000 plus 20% VAT of £20,000 and Developer Ltd would have paid £120,000 to the Construct Ltd and Construct Ltd would in turn pay £20,000 to HMRC. However, under DRC rules, it is responsibility of the Developer Ltd to account for £20k VAT and so it will pay only £100k to the Construct Ltd.  

What falls within the scope Domestic Reverse Charge (DRC)?

As a general rule, only those services that are within the scope of CIS is affected by DRC rules. This means the DRC applies to specified construction services such as construction of buildings, painting, decorating, heating installation, etc. 

However, unlike CIS, DRC will extend to any building materials on the invoice if is part of the single supply of construction services. 

Also, where an invoice contain some services liable to the DRC and some not, then the entire invoices is liable to the DRC. 

What falls outside the scope of Domestic Reverse Charge (DRC)?

  • Supplies to an end-user, eg the property owner where there is no onward supply by them. The end-user would need to confirm their end-user status to the sub- contractor. 
  • Zero-rated supplies, e.g. construction of new built residential properties 
  • Services that that are specifically excluded from CIS
  • Supplies to a customer not registered for VAT
  • Supplies of construction workers (however, labour only sub-contractors are within the scope of DRC) 
  • Supplies of goods only 

Following are generally outside the scope of the DRC: 

How you show DRC in VAT Return?

If you buy services subject to the reverse charge, you must enter the VAT charged as output tax in box 1 of your VAT return. If you eligible to claim VAT on the reverse charge purchases, you would also enter the VAT in the box 4 of your VAT return. 

Suppliers should not enter any output VAT on sales under the reverse charge in the box 1 of VAT return as this will be accounted by the customer. However, supplier still need to enter the net sales in the box 6. 

What should be mentioned in the invoices issued by Suppliers of DRC?

When supplying a service subject to DRC, the suppliers must show all the information required on a VAT invoice (as usual) plus following additional things: 

  • Note on the invoice to make it clear that DRC applies and the customer is required to account for the VAT
  • State the amount of VAT due or the rate of VAT applicable under the reverse charge (but, the VAT should not be included in the amount charged to the customer). 

HMRC has provided an example of DRC invoice as in the link. 

Raju Gajurel
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