HM Revenue & Customs are looking to shake-up the construction industry to ensure they are getting the most from those involved. After being delayed twice the new VAT Domestic Reverse Charge (DRC) went live on 1st March 2021. It is the most significant change to VAT in construction services in 30 years.

In short, it meant from 1st March, sub-contractors in a CIS chain of supply will cease to collect VAT from other contractors. In its place a reverse charge system will apply. This makes the buyer of the sub-contractor’s service liable for VAT accounting in place of the supplier.

This means that on top of other current cash flow concerns, the construction industry is now required to focus heavily on cash flow planning. Despite now being in place since March 2021, both contractors and subcontractors are still being caught out if they are not planning well and managing their cash flow appropriately.

Domestic Reverse Charge VAT: The key points

Why is the change happening?

The new regulations are intended to counter “missing trader fraud” – where a trader reclaims input VAT that the supplier has no intention of ever paying over to HMRC. HMRC estimates that over £100m a year is lost by this and similar types of frauds. Their solution is to change the way VAT is collected so that there is nothing to defraud.

How the Domestic Reverse Charge works

From 1st March 2021, the reverse charge meant the customer receiving the service will have to declare the VAT due to HMRC instead of paying it to the supplier. They can simultaneously recover the VAT in the usual way by showing it on the same VAT return as paid on purchases.

This is effectively like a CIS style system for VAT payments on construction services.

Who does Domestic Reverse Charge apply to?

Broadly, Domestic Reverse Charge applies when:

  1. Both the supplier and customer are VAT registered
  2. Both the supplier and customer are Construction Industry Scheme (CIS) registered
  3. The supply includes construction services
  4. The services supplied are subject to VAT at either the 20% standard rate or 5% reduced rate
  5. The customer is not the end user

Knowing whether the customer is an end user is an area of concern. HMRC guidance states that if there is any doubt, the supplier should ask the customer is they are the end user and keep a record of their response.

Does Domestic Reverse Charge mean you have more admin?

If you are the customer in the above relationship, then this has resulted in significantly more admin for you to deal with. The main software companies (Sage, Xero and QuickBooks) have updated their software to accommodate this, but it’s important to monitor the cash flow impact regularly.

Usual quarterly processes and internal record-keeping should be adjusted to ensure you are keeping up to date with the compliance element of the changes, but also planning forward for the fluctuating cashflow whether this be higher VAT bills or VAT refunds.

How to deal with cash flow problems due to Domestic Reverse Charge

Domestic Reverse Charge has undoubtedly caused cash flow problems for many construction businesses and subcontractors.

Any business who suddenly lose 1/6th of the money you usually receive from your customers need to make some serious adjustments.

But this is only a timing difference. Because you no longer pay the VAT on some of your sales to HMRC, you have become what is known as “repayment traders” i.e. your VAT Return is a net claim from HMRC instead of a net payment.

Move to monthly VAT returns

If you are repayment trader, then to alleviate cash flow problems you can apply to move to monthly returns to speed up payments due from HMRC.

The best time to move to monthly returns is as soon as you are aware that you are receiving regular repayments.

Despite the increased burden of monthly returns, this allows the inflow of VAT faster than quarterly returns.

The last straw?

For many small construction businesses, this extra piece of legislation and admin may represent the last straw when all they want to do is get on with earning a living.

If that’s how you feel, A4G Bookkeeping provide comprehensive services to take care of all of this for you from basic bookkeeping, Construction Industry returns, VAT and management accounts. Rates are competitive and more importantly you have peace of mind that all the admin and red tape is being taken care of, enabling you to earn more or simply have a bit more time for yourself.

Book your free consultation

How can we help you?

If have been affected by the new regulations, or you are concerned you may not be compliant, we can provide a review of your processes and financial information and advise how these can be improved.

A Domestic Reverse Charge telephone consultation with a qualified adviser at A4G costs only £75 + VAT and includes a free tailored report setting out the impact on you and the steps you need to take.

To arrange a consultation with one of our experts, call 01474 853 856 or email

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Joseph Cutting


Principal Adviser

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