Building materials - reverse charge or not?

The DRC for CIS

The VAT domestic reverse charge (DRC) for the construction industry was introduced in 2021 to help prevent tax avoidance. As the name suggests, the DRC reverses the responsibility for accounting for VAT on supplies made in the construction industry from the supplier to the customer.

The DRC only applies to services made to other construction businesses where that business in not the “end user”.

Example. Martin, a construction groundworker, is registered for VAT. He’s currently working for a contractor who in turn is working for the main contractor on a house-building site. In October 2024 Martin bills the contractor for £6,000. He charges no VAT but adds a note to his invoice saying that his services are within the scope of the DRC and therefore the contract must account for the VAT on its next return.

Where the DRC applies to services you receive you decide the correct VAT rate that should apply, i.e. the standard rate (20%) or, where the supply relates to construction of qualifying residential property, zero or the reduced rate (5%).

What does the DRC apply to?

This question often causes confusion because of the rules which apply to the general construction industry scheme (CIS), which is also likely to be relevant for the same supply.

Under the CIS the value of materials supplied are excluded, whereas the value of materials is subject to the DRC with two exceptions.

DRC exceptions

Where the subcontractor is VAT registered there are two circumstances where the DRC doesn’t apply to services or materials:

1. For services where their value is no more than 5% of the total supply (this is known as the 5% disregard).
2. And materials if there’s no associated supply of services, subject to the DRC. Note that machine hire supplied without the services of an operator counts as the supply of materials only.

Example - 5% disregard. Bob is a subcontractor on a site where commercial property is being built. However, in this instance his main supply is the use of his digger. He bills the contractor, Ahmed, £2,500 for this plus £130 for some minor work he did on site on the day he delivered the digger. The DRC does not apply to any of the amount he bills Ahmed because the £130 for his services is not more than 5% of the £2,600.

Example - unrelated materials. Bob’s next bill to Ahmed is £4,000 for use of his digger and his services as an operator. He adds £310 to the bill for some timber he supplied to Ahmed. The timber was not related to the digger hire and operator charges. Therefore, the DRC applies to the £4,000 but not the £310 because it wasn’t connected to the supply of services made by Bob. He must charge Ahmed VAT of £62 (£310 x 20%).

For invoices from subcontractors, unless either of the exceptions to the DRC apply, VAT should not be charged on materials and you must not reclaim it. Instead, ask the subcontractor for a new invoice excluding VAT on the materials.