Since its introduction in March 2021, the Domestic Reverse Charge (DRC) has reshaped how VAT is handled in the UK construction industry. Designed to prevent VAT fraud, it shifts the responsibility for reporting VAT from the supplier to the customer.
However, one aspect that continues to cause uncertainty is the end user provision.
What is the Domestic Reverse Charge?
The DRC applies when all of the following conditions are met:
- Both the supplier and the customer are VAT registered;
- The customer is registered under the Construction Industry Scheme (CIS);
- The services fall within the scope of CIS; and
- The customer is not an end user (i.e. they are resupplying the services) or have not provided written notification of end user status – see “The Critical Step: Written Notification” below.
In these cases, the supplier does not charge VAT. Instead, the customer accounts for VAT on their VAT return, reporting it as both:
- Output tax (Box 1)
- Input tax (Box 4), assuming full VAT recovery is allowed
Who qualifies as an end user?
An end user is a VAT-registered business that uses construction services for its own benefit, rather than selling them on or using them in further construction work.
If a business qualifies as an end user, the DRC doesn’t need to apply – but only if this status is clearly communicated.
An intermediary supplier is different to an end user, but for this purpose the rules apply to both.
The critical step: written notification
Being an end user is not enough on its own. To ensure the DRC doesn’t apply, the customer must provide written notification to the supplier confirming their end user status. This can be:
- Included in the contract;
- Sent by email; or
- Provided in a letter.
Without written confirmation, the supplier must apply the DRC – even if it’s obvious that the customer is an end user.
This means the responsibility sits with the end user to understand their position in the supply chain and communicate it clearly, in writing.
Failing to do so can result in incorrect VAT treatment, unnecessary delays, and potential compliance risks.
Supplier responsibilities
Suppliers are not expected to verify end user status independently. If no written notification is provided the DRC must be applied by default. Suppliers can request written confirmation, but customers are not obliged to provide it. If VAT is charged incorrectly without proper documentation, HMRC are likely to treat this as an error.
Compliance and consequences
In reality, errors around end user status can have significant consequences for what many may perceive to be a trivial mistake. Although there may be an argument from a taxpayer that the net liability between the parties is neutral, we have seen HMRC taking a tough stance on this which can result in potentially significant interest charges for the party who have claimed input tax in error.
This highlights the importance of getting the treatment right from the outset. Clear documentation and a solid understanding of the rules are key to avoiding unnecessary costs or compliance risks.
Why end users matter
Understanding the end user rules is essential because:
- It determines whether the DRC applies
- It affects both VAT reporting and business cash flow
- Incorrect application can lead to HMRC scrutiny and/or disputes and delays.
In summary, end users have the option – but not the obligation – to use standard VAT treatment.
Key takeaways
- End users must provide written notification to avoid the DRC
- Suppliers must apply the reverse charge if the conditions are met unless told otherwise by the end user
- Interest will be charged by HMRC on overclaimed input tax – especially if the end user status is incorrectly applied
Unsure if you need to apply the reverse charge?
Use this flowchart to help determine if you need to apply the DRC to your transactions.
Get in touch
If you’re unsure how the Domestic Reverse Charge applies to your situation – or want to ensure you’re fully compliant – our VAT specialists are here to help.
Get in touch by emailing andrew.kirkaldy@pmm.co.uk for expert advice tailored to your business.
