CIS Domestic Reverse Charge

This is probably one of the biggest changes in VAT for a very long time and ranks up there with Brexit.

From 1 March 2021, the domestic reverse charge (DRC) will massively change the way subcontractors and contractors in the building industry interact for VAT.

The DRC will affect standard and reduced rated supplies if payments are reported through the construction industry scheme (CIS) no matter what the subcontractor’s statue is for CIS. Zero rated supplies are excluded but then there is no VAT being charged anyway.

The DRC will only apply to supplies between VAT registered sub-contractors and VAT registered contractors. If one or other is not VAT registered the DRC does not apply.


A VAT registered subcontractor invoices a VAT registered main contractor and accounts for labour under CIS if necessary. CIS will apply to the labour element, but the DRC will apply to both labour and materials.

The subcontractor must:

  • Raise as invoice with no VAT charged.
  • Include DRC narrative on their invoice such as “Reverse charge: Customer to pay the VAT to HMRC”.
  • Make a Box 6 entry for the value of the invoice on their VAT return

The main contractor must make the following entries on their VAT return:

  • Box 1 £VAT that the subcontractor would have charged apart from DRC,
  • Box 4 £VAT for the same amount,
  • Box 7 £net value of the invoice.

The Box 4 recovery may need to be adjusted if the main contractor is partially exempt.

From 1 March 2021, DRC must be applied to the invoice as any VAT charged in error will not be properly charged and the main contractor will not be able to recover it as input tax. The main contractor must therefore be on their toes.


Many online accounting packages will already have made provision for accounting for the DRC and if you raise invoices through the online Software all the appropriate wording should already be in place. Watch out as you may need to set up new rates for VAT such as

Domestic reverse charge @ 20%

Domestic reverse charge @ 5%

Flat rate scheme

DRC supplies are excluded from flat rate scheme so it would be advisable for subcontractors to revert to normal VAT accounting. This is because you will then be able to recover input tax on your expenses and overheads. It will also mean that you are now likely to become a repayment trader, getting VAT back every time you submit a VAT return. You should therefore consider applying for monthly VAT returns so that you get the tax back sooner.

Cash flow

Many sub-contractors rely on collecting the output tax as a useful source of working capital as it does not need to be paid to HMRC right away. This source of finance will no longer be available.

On top of this, any VAT payments to HMRC deferred last year will be due for payment shortly. You may want to speak to HMRC about a time to pay arrangement. Our understanding is that HMRC will be sympathetic to such approaches.

Monthly VAT Returns

Applications are normally accepted from the start of the month of application so an early March 2021 application would be sensible. You will then have a one, two or three month VAT period to finish off your previous quarterly submissions. But you will then have monthly returns and repayments from March 2021.

Labour only subcontractors will not benefit significantly from monthly returns so may choose to remain quarterly.

You may want to get your records sorted out ahead of moving to monthly returns. Get in touch if you need help with this.

Online software such as QuickBooks will deal with MTD and DRC reporting and will facilitate the submission of monthly VAT returns. It will also ensure you are compliant with the record keeping regulations.

Services affected by the domestic reverse charge

The DRC covers specified supplies which will be 20% and 5% building and construction services reported under the CIS. The DRC will cover all the services and materials provided with those services.

20% VAT jobs – The DRC will therefore apply to subcontractors working for main contractors on commercial projects, construction of relevant residential or relevant charitable and domestic extensions or renovations.

5% VAT jobs – The DRC will also extend to subcontractors working for main contractors on the conversion of commercial properties to residential or converting houses into flats.

The construction industry scheme

The DRC covers specified supplies reported under CIS subject to a few exceptions. I

The CIS only applies to contractors, who are either:

  • Persons carrying on a business which includes construction operations, or
  • Other persons spending more than £1m each year on construction operations.

So for example a property investment company will not be undertaking construction services itself and will only be a “contractor “ and therefore within CIS if it spends more that £1M on construction services annually.

Construction operations

These include:

  • Construction, alteration, repair, extension, demolition or dismantling of buildings;
    • The installation of heating, lighting, air-conditioning, power supply, drainage or sanitation systems; and
    • Cleaning, painting, decorating and other operations integral to the construction process (such as excavation and site-preparation)

Professional work is exempt (architects, engineers) from CIS and consequently exempt from the DRC as are individuals engaging subcontractors for work on their home.


Subcontractors are those carrying on construction operations for a contractor or those furnishing own labour or the labour of others in carrying out construction operations. They could be sole traders, partnerships or companies.

Mixed invoices

If any of the services on the invoice are subject to the DRC then the whole invoice will be subject to the DRC. This will include materials and non-CIS services.

If the contract has some invoices which are subject to DRC, the parties can agree that all subsequent invoices are subject to DRC even if they would not qualify in their own right. HMRC appreciate that some contracts will have mixed supplies i.e. some within the DRC and some outside of the DRC.

HMRC guidance suggests that if you are ever in doubt you should always apply the DRC to construction services supplied to VAT registered businesses.

End user exception

The DRC does not apply to services provided to an end user.

End users are consumers or final customers of building and construction services who might be VAT registered business in their own right but who do not onward supply construction services.

However, there will be end users who want the DRC to apply because it gives them a cash flow advantage. If they refuse to confirm their end user status in writing to the subcontractor, DRC must be applied.

Confirming end user status

HMRC guidance suggests something like:

“We are an end user for the purposes of section 55A VATA 1994 reverse charge for building

and construction services. Please issue us with a normal VAT invoice, with VAT charged at the

appropriate rate. We will not account for the reverse charge”

Checking VAT and CIS status

Under the DRC the customer must be VAT and CIS registered. It would therefore be prudent for the subcontractor to check the VAT and CIS status of any new customer.

VAT status

Where the customer is not an end user the supplier should obtain and verify the customers VAT number. This can be done via

Keep evidence of the check but there is no need to include the customer VAT number on the DRC invoice.

CIS status

If there is an existing CIS contract at 1 March 2021 there is no need to verify CIS status again. New contracts commencing on or after 1 March 2021 should be validated using the free HMRC CIS online service or commercial software.

In some cases, the status of the customer may change during a contract and it is up to the customer to advise the subcontractor accordingly so that the DRC treatment can be amended.

If an invoice straddles a change in end user status the supplier can apply DRC to all of the invoice or to none of it. The DRC must however be applied to any subsequent invoices.

Tax points

The tax point will determine whether the subcontractor charges VAT or whether they apply the DRC. There is no requirement to apportion invoices either side of the 1 March 2021.

Building services are typically a continuous supply of services and as such the tax point is the earlier of:

  • Invoice date, or
  • Payment

If this falls before 1 March 2021 the supplier will charge VAT. Likewise if the tax point falls on or after 1 March 2021 the DRC will apply.

For single payment contracts the basic tax point is the date the service is performed but this could be earlier if invoiced or paid. The tax point will determine whether the supplier charges VAT or applies the DRC. It is expected that in practice most people will determine the DRC status according to the invoice date, as long as the invoice is issued promptly.

Authenticated tax receipts and self-billed invoices

Authenticated receipts are used in the construction industry in place of VAT invoices for supplies of services, or of goods and services, made under contracts that provide for periodic payments to be made. This allows a supplier to authenticate a receipt for payment issued by the customer instead of issuing a normal VAT invoice, on condition that:

  • the receipt contains all the particulars required on a VAT invoice
    • no VAT invoice or similar document is issued

Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment.

The tax point for authenticated receipts and self-billing is normally the date the supplier receives payment.

Transitional rules apply where payments due are entered onto the accounting system before 1 March 2021 but are not paid until later.

If entered in accounting system before 1 March 2021 and paid on or before 31 May 2020, normal VAT rules apply. If paid on or after 1 June 2021, DRC must be applied.

If entered in accounting system on or after 1 March 2021 and paid on or after 1 March 2021, as you would expect, the DRC applies.

Cash accounting

Cash accounting cannot be used for supplies subject to the DRC. You can however use cash accounting for the remainder of your activities.

For subcontractors, invoice accounting will accelerate the recovery of input VAT which will improve cash flow. From a contractor perspective they will put the output VAT and input VAT recovery on the same return, so they are not disadvantaged.

If the customer is partially exempt, they will need to be careful with the tax point as there is a tax loss if they put it on a later VAT return and penalties are a risk.


When supplying a DRC service, the invoice must show all the information required on a VAT invoice. Additionally, there must be a note on the invoice to make it clear that the domestic reverse charge applies and the customer is required to account for VAT.

Credit notes

If a supplier issues a credit to a customer who can reclaim all the tax on their supply, they do not have to adjust the original VAT charge if both parties agree. The same can apply to any credit note under the DRC.

However, if the parties do not agree or the customer is partially exempt, VAT adjustments are required. Suppliers must issue a credit note to the customer with a note on it to show that the DRC applies and showing the reduction in the VAT the customer has to pay to HMRC.


These are big changes and if you need help, just get in touch. We can help to explain the new arrangements.

We can also assist with changing your VAT arrangements such as adopting monthly returns and ensuring that your VAT records are appropriate for DRC and MTD.



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