Understanding the VAT Domestic Reverse Charge for Contractors 🏗️
Listen to the MA & CO Podcast The VAT Domestic Reverse Charge (DRC) was introduced by HMRC on March 1, 2021 , to prevent VAT fraud in the construction industry . This rule changes how VAT is accounted for on certain construction services, shifting the responsibility from the supplier to the customer. How Does the VAT Domestic Reverse Charge Work? 🔄 Instead of a contractor charging VAT to a subcontractor and then paying it to HMRC , the subcontractor must report the VAT themselves on their return. This applies to VAT-registered businesses within the Construction Industry Scheme (CIS) . Example Calculation: A subcontractor provides services worth £10,000 to a contractor. Under the previous system, the subcontractor would charge £2,000 VAT (20%) , bringing the invoice total to £12,000 . With reverse charge , the subcontractor invoices only for £10,000 (excluding VAT), and the contractor accounts for the VAT directly to HMRC . The contractor records £2,000 VAT as both output ta...