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Domestic Reverse Charge VAT for Construction Services Explained

Just what the world needs – more types of tax. The Domestic Reverse Charge (DRC) for construction services is a tax change that came into effect on 1 March 2021. The DRC applies to businesses that supply construction services to other businesses, which means they cannot charge VAT on those supplies anymore. Instead, the person or business that has received the construction services is now responsible for accounting for the VAT. So the customer rather than the supplier is liable to account for and pay the VAT to HMRC.

Who does the DRC apply to?

The VAT domestic reverse charge must be used for most supplies of building and construction services and applies to standard and reduced rate VAT services for businesses who are registered for VAT in the UK and reported within the Construction Industry Scheme.

How to comply with DRC

If you’re a supplier of construction services, you not only need to know about the DRC, but make sure you’re on the right side of the law to keep the HMRC happy and avoid incurring a penalty. 

Here are our tips to help you comply with the DRC:

  • Identify your customers. Make sure you know which of your customers are VAT-registered businesses.
  • Check your invoices. Check that your invoices do not include VAT for construction services supplied to VAT-registered businesses.
  • Register for the DRC. If you’re not already registered for the DRC, you must do so. You can register online at GOV.UK.
  • Keep records. Keep records of all the construction services you supply to VAT-registered businesses. They should include the date and value of the supply and the customer’s VAT registration number.

Extra tips for complying with DRC

Here are some more helpful tips if you’re affected by the DRC:

  • Talk to your accountant. If you’re unsure how the DRC will affect your business, talk to your accountant. They’ll be able to help you understand the changes and make sure you’re compliant.
  • Use accounting software. Accounting software helps you to keep track of your VAT transactions and ensures that you’re correctly accounting for the DRC.
  • Be prepared for challenges. The DRC is a complex change, and it may take time for businesses to adjust. Be prepared for some initial challenges, and be patient as you work through them.

By following these tips, you can make sure the transition to the DRC is as smooth as possible and that you’re compliant and keep the HMRC and their fines at bay.