HMRC DRC – ‘Perhaps not all builders are like Bob’

HMRC concluded years ago that perhaps not all builders are like Bob. Maybe they saw “Auf Wiedersehen, Pet” and thought it was a documentary(?). But whatever it was, they clearly see the construction industry as a risk to the Treasury and deserving of special tax measures. most recently, the Domestic Reverse Charge for construction services (“the DRC”).

The DRC is an anti-fraud measure that came into effect on 1 March 2021. Getting DRC right will be troublesome, as the responsibility will fall across the organisation.

It’s important to know what to do when the DRC applies, and when it doesn’t.

What is a reverse charge?

Normally, the supplier charges VAT to the customer and pays it to HMRC, and the customer pays VAT to the supplier and reclaims it from HMRC (subject to their VAT status).

In a reverse charge, the customer does all the VAT accounting. The supplier does not charge VAT to the customer, but the customer pays the supplier’s VAT directly to HMRC and reclaims it as usual.

There is no difference in the amount of VAT paid to HMRC or reclaimed from HMRC.

When does the DRC apply?

It applies (subject to the conditions below) when an organisation buys construction services and resupplies some or all of them.

DRC Conditions

It applies (subject to the conditions below) when an organisation buys construction services and resupplies some or all of them.

The DRC applies to:

  • CIS-reportable construction services;
  • supplied by a VAT-registered supplier;
  • that are liable to VAT at 5% or 20%;
  • Where the customer is VAT-registered.


An “end user” is a taxable person who is a recipient of specified services and uses those services for any purpose other than making further supplies of specified services.  Public bodies will be end-users for works to their property or where the procurement of the construction services is to discharge responsibilities under a special legal regime for example.


The DRC does not apply to someone who procures construction services that it resupplies without material alteration to:

  1. a person in the same corporate group or undertaking as defined in section 1161 of the Companies Act 2006 (a connected person); or
  2. a person who shares a “relevant interest” in the same land where the construction works occur.

For public bodies, the exception under a) above can apply to supplies to and from subsidiary companies, such as wholly-owned local authority trading companies, for example (providing the definition applies to the company set up).

The exception at b) applies to supplies to and from lessors and lessees (landlord and tenants). It also applies to supplies to and from licensors and licensees (under a licence to occupy). It does not apply to an occupation that is not under a lease or under a licence to occupy.

If the public body is an end-user or intermediary under these conditions, it can declare that to its supplier.

DRC: responsibilities

Under DRC, suppliers must determine if services are:

  • to a VAT-registered person;
  • at a positive rate of VAT; and
  • CIS-reportable.

Customers are responsible for notifying end-user and intermediary status in writing. Without notification, suppliers will treat construction services as subject to the DRC and not charge VAT (if all other conditions are met).

Most construction services supplied to public bodies will not fall under the DRC because they will not be resupplying the services (they are for their own use).

Mixed supplies

If a supply of construction services contains any DRC element, the whole supply will generally be subject to the DRC. However, the DRC element of a mixed supply can be ignored if it is 5% or less (by value) of the whole supply. Then, the entire supply is outside the DRC. HMRC calls this the 5% disregard, and it is not compulsory.

DRC implementation

Organisations should have procedures for assessing their status when procuring construction services. If they are end-users or intermediaries, they must have policies to ensure their suppliers are notified. VAT will be charged as normal. Procedures also need to be in place for supplies of construction services a public body makes, and DRC applied when the customers have not notified end-user or intermediary status and all other conditions are met.

Please get in contact if you’d like PSTAX to assist you in putting together any processes or if you’d like help with any in-house training.

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Richard Strevens

Written by Richard Strevens

Richard has been specialising in public sector VAT for over 25 years. Having worked for District and London Borough Councils for a combined period of 21 years, Richard moved to the private sector accounting firm BDO in 2007, before joining PSTAX in March 2009.

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