What is a domestic reverse charge and which sectors does it apply to?
A domestic reverse charge (DRC) shifts the VAT accounting obligation from the supplier to the buyer for certain domestic supplies where VAT fraud risk is high. The supplier issues an invoice showing zero VAT with a note that the domestic reverse charge applies; the buyer accounts for output VAT on the purchase in their own VAT return and simultaneously claims it as input VAT (if they are entitled to full recovery). DRCs are used in construction, mobile phones, computer chips, emissions allowances, and renewable energy sectors in the UK and across EU member states.
How should an invoice look when a domestic reverse charge applies?
DRC invoice requirements: (1) Show the net amount of the supply (no VAT charged by the supplier); (2) Include the statement 'Reverse charge: VAT Act 1994 Section 55A applies' (UK) or equivalent national reference; (3) Show the VAT rate that would apply (e.g., 20 percent) for the buyer's reference; (4) Do NOT show a VAT amount (the supplier does not charge VAT); (5) Include the supplier's VAT number; (6) The buyer adds output VAT at the applicable rate in their VAT return, and deducts the same amount as input VAT (if entitled).
Frequently Asked Questions
- Does the domestic reverse charge apply to all construction services in the UK?
- The UK Construction Services DRC applies to VAT-registered subcontractors supplying construction services to VAT-registered contractors (not end users). It applies to most construction services within the scope of the CIS (Construction Industry Scheme). It does not apply to: supplies to end users (final customer paying for construction directly), suppliers who are deemed contractors under CIS, or construction services that are zero-rated or exempt. The DRC also does not apply if the customer is not VAT-registered.
- Can a buyer recover VAT on a domestic reverse charge purchase?
- Yes. A buyer applying the domestic reverse charge accounts for output VAT on the purchase and may simultaneously deduct the same amount as input VAT, provided the purchase is used for taxable business purposes. For a fully taxable business, the reverse charge is VAT-neutral (output VAT equals input VAT, net effect zero). For partially exempt businesses, the input VAT recovery is subject to the partial exemption restriction, creating a real VAT cost on the purchase.