Who this is for: UK property developers, main contractors, and specialist subcontractors operating within CIS who want clean invoicing, fewer reworks, and zero VAT surprises.
Why it matters: If you misapply the DRC you can under/over-charge VAT, disrupt cashflow, and face assessments, penalties and interest. HMRC’s technical guide and manual clarify when DRC applies, when it doesn’t (e.g., end users & intermediary suppliers), and how it interacts with CIS. We’ve distilled the most common pitfalls—and how to avoid them. GOV.UK
10 DRC Pitfalls We See Most (and How to Fix Them)
1) Treating DRC like CIS (they’re not the same)
CIS deductions apply to labour only (excluding materials) while DRC, when it applies, covers the whole supply on the invoice (labour and related materials). Many teams copy their CIS “labour-only” base into VAT, which is wrong. Fix: If DRC applies, your invoice shows no VAT and the customer reverse-charges on the full taxable amount. Keep CIS on labour only. GOV.UK
→ Deep-dive: CIS invoice anatomy: labour vs materials (with worked examples)
2) Missing “end user” or “intermediary supplier” written notification
DRC does not apply where your customer is an end user or an intermediary supplier, but only if they have notified you in writing. Relying on verbal confirmations or assumptions is a classic mistake. Fix: Build a standard end-user/intermediary declaration into onboarding and contracts; file it with each job. No notification = you must apply DRC if other conditions are met. GOV.UK
3) Charging VAT because “materials are on the invoice”
If the supply is within the DRC scope, you still don’t charge VAT, even when materials are recharged with labour. The customer self-accounts for the VAT on the full value. Fix: Keep DRC wording on the invoice and ensure your software template doesn’t add VAT to materials lines when DRC is ticked. GOV.UK
4) Forgetting DRC doesn’t apply to everyone, every time
DRC applies to most business-to-business construction services reportable under CIS where both parties are VAT-registered and the customer is not an end user/intermediary (or hasn’t notified as such). Fix: Use a pre-job DRC flow: (a) are both parties VAT-registered? (b) is the supply within CIS scope? (c) end user/intermediary written status? (d) then apply/not apply DRC accordingly. GOV.UK
5) Missing the exact invoice wording
Invoices must clearly state that VAT is to be accounted for by the customer under the domestic reverse charge, and display the VAT rate that would apply (e.g., 20% or 5%) for the customer to self-account. Fix: Standardise your templates with HMRC-aligned wording and include the customer’s VAT number. GOV.UK
6) Treating employment businesses as if DRC applies
There’s a difference between supplying construction services and supplying workers (employment businesses). DRC typically does not apply to supplies of workers by an employment business. Fix: Map each engagement type to the HMRC examples in the technical guide and manual; document your decision. GOV.UK
7) No evidence trail → assessments + interest risk
If DRC output tax is misdeclared (by supplier or customer), HMRC can assess tax misdeclared and charge penalties/interest. Lack of end-user letters, VAT numbers, and job-file notes is a red flag. Fix: Keep a DRC pack per job: VAT numbers, end-user/intermediary letter, CIS/DRC decision memo, and invoice copy. GOV.UK
8) Not aligning DRC with your software
We often see “VAT added by default” templates or nominal codes that don’t post reverse-charge outputs/inputs to the correct ledgers. Fix: In Xero/QuickBooks/Sage, enable DRC tax codes, lock invoice wording, and test reports so your returns show the reverse-charged VAT correctly. (We configure this in our CIS & DRC workflow session.)
→ How-to series: CIS returns & statements in Xero/QuickBooks/Sage
9) Confusing DRC with overseas reverse charge
DRC (domestic construction) is separate from the general reverse charge on cross-border B2B services. Don’t mix rules. Fix: If your supplier is overseas, consult place-of-supply rules and the general reverse charge—not the construction DRC. Tax Adviser
10) Skipping the status check → wrong regime entirely
DRC sits after your employment status and CIS decisions. If the worker should be an employee, PAYE/NIC applies—not CIS/DRC. Fix: Run CEST, file the output, then apply CIS/DRC where appropriate. GOV.UK
→ Clarifier: CIS isn’t employment status: getting PAYE vs subcontractor right
Worked Example (side-by-side)
Scenario: VAT-registered subcontractor supplies labour and materials to a VAT-registered main contractor; supply is within CIS; customer is not an end user/intermediary (no written notification).
| Line | Amount | Treatment |
|---|---|---|
| Labour | £10,000 | CIS applies to labour base |
| Materials | £4,000 | Included in the DRC total |
| VAT on invoice | £0 | DRC → no VAT charged on the invoice |
| Invoice total | £14,000 | Customer self-accounts VAT on £14,000 at the correct rate |
| CIS deduction (example 20% on labour) | £2,000 | You pay sub £12,000 and remit £2,000 to HMRC |
Why? DRC covers the whole supply (labour + related materials) when in scope; CIS still applies only to labour. GOV.UK
→ Related: CIS vs VAT Domestic Reverse Charge: when both apply
Compliance Flow (copy/paste into your month-end)
- Status first (CEST saved to file). GOV.UK
- CIS decision & verification (rate 0/20/30; verification stored).
- DRC decision (VAT-reg both sides? CIS-reportable? end-user/intermediary letter?). GOV.UK+1
- Invoice control (template shows reverse-charge wording + customer VAT no.). GOV.UK
- Statements & returns (CIS300 by 19th; VAT return shows reverse-charged outputs/inputs correctly). GOV.UK
Strong FAQ (practical & defendable)
Does DRC apply if I only recharge materials?
If your invoice is materials-only, DRC usually does not apply (no construction service supplied). When labour is present and the supply is within scope, DRC covers the whole charge (labour + related materials). GOV.UK
What exactly must the invoice say under DRC?
State that “VAT is to be accounted for by the customer under the domestic reverse charge,” show the VAT rate that would have applied, and include the customer’s VAT number. Use HMRC-aligned templates. GOV.UK
We think our customer is an end user. Can we skip DRC?
Only if the customer has notified you in writing that they are an end user (or intermediary supplier). Keep the letter on file-no letter, no exclusion. GOV.UK
What if we mis-treated DRC on past invoices?
HMRC can assess misdeclared reverse-charge output tax with penalties and interest. Correct promptly and document your rationale. GOV.UK
How does this interact with CIS?
CIS covers labour (deductions on the labour element only). DRC, when in scope, covers the whole supply (labour + related materials) and moves VAT accounting to the customer. Use both correctly on the same invoice where applicable. GOV.UK
Where do I see the official scope and examples?
HMRC’s technical guide (updated 18 September 2024) and manual sections on end users/intermediaries provide detailed scenarios. GOV.UK
Related Guides & Spin-offs (internal links)
- CIS vs VAT Domestic Reverse Charge: when both apply
- CIS invoice anatomy: labour vs materials (with worked examples)
- Subcontractor verification (CIS): what to check and store
- How to qualify for (and keep) CIS Gross Payment Status in 2025/26
- Deemed contractor rule explained: calculating the £3m spend and when it bites
- CIS returns & statements in Xero/QuickBooks/Sage
- CIS isn’t employment status: getting PAYE vs subcontractor right
- CIS penalties & appeals (and how to protect or reinstate GPS)
- Free resource: CIS setup checklist for developers (PDF)
Sources (GOV.UK & HMRC)
- VAT DRC technical guide (scope, invoicing, examples; last updated 18 Sep 2024). GOV.UK
- When you must (and must not) use DRC (core rules). GOV.UK
- HMRC manual – End users/intermediary suppliers & notification (written notification required). GOV.UK
- HMRC manual – Scope & interaction with CIS (DRC applies to the whole payment; CIS to labour). GOV.UK
- Reverse charge error consequences (assessments, penalties, interest). GOV.UK
- VAT Notice 735 (domestic reverse charge procedure background). GOV.UK
Standard CTA (Heights style)
Want this set up cleanly—no rework?
Book a 20-minute DRC & CIS Workflow Check. We’ll review your end-user/intermediary process, invoice wording, software tax codes, and CIS/DRC interaction.
You’ll leave with: a defendable End-User/Intermediary Letter template, locked invoice wording, and a month-end DRC/CIS checklist for your team.
→ Book now