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VAT: Domestic Reverse Charge now live in Xero

Posted 3 years ago in Advisors by Xero
Posted by Xero

We’re pleased to announce that the Domestic Reverse Charge (DRC) is now live in Xero. The new feature will help you comply with your DRC obligations. 

DRC intends to cut down on “missing trader” fraud, where companies receiving high net amounts of VAT from their customers have no intention of ever paying over to HMRC. 

DRC only applies to individuals or businesses registered for VAT in the UK. 

Products and services affected by DRC

The Domestic Reverse Charge for building and construction services was due to come into effect on 1 October 2019 however industry representatives raised concerns about the readiness of some businesses. So to give businesses additional time to prepare HMRC delayed the regulation until 1 October 2020

You can learn more about Domestic Reverse Charge here.

For the time being our new DRC feature can be used for the following products and services affected by the regulation:

  • Mobile phones 
  • Computer chips
  • Wholesale gas
  • Wholesale electricity
  • Emissions allowances 
  • Wholesale telecommunications 
  • Renewable energy certificates 

For more information on products and services subject to the DRC read HMRC’s guidance here.

Xero’s new DRC feature

Xero’s new feature helps you comply with the Domestic Reverse Charge, whilst reducing errors and saving precious time. 

Xero now includes:

  • Four new taxes to help you comply with DRC: 20% VAT on Income, 5% on VAT Income, 20% VAT Expenses, 5% VAT on Expenses
  • Automatic DRC calculations in your invoices, bills and credit notes
  • Automatic DRC updates on your Making Tax Digital return

How to add DRC tax rates in Xero

It’s easy to add the Domestic Reverse Charge tax rates in Xero – just follow the simple steps below and you’re all set.

  1. In the Accounting menu, select Advanced
  2. Click Tax rates
  3. Click Add Domestic Reverse Charge Tax Rates
  4. Click Add Domestic Reverse Charge Tax Rates to confirm

See it in action

Impact on the VAT return for suppliers

Under the Domestic Reverse Charge, suppliers that provide a specified service don’t account for the VAT due on the supply.

When completing the VAT return, Xero:

  • Enters the total value of the sales subject to DRC (including credit notes) in Box 6 of the return as normal
  • Doesn’t record any sales tax in Box 1, as this is accounted for by the contractor

Impact on the VAT return for customers

Customers receiving a specified service account for the VAT on sales, by selecting a DRC tax rate on the invoice. The VAT on sales gets deducted as an input in the VAT return, which means no net tax is payable to HMRC.

When completing the VAT return, Xero automatically:

  • Enters the tax on purchases subject to DRC, including any reductions due to credit notes, in Box 1 of the return
  • Reclaims the input tax on the DRC purchases in Box 4, subject to the normal rules This includes any reductions due to credit notes
  • Enters the net value of the purchases under DRC (including credit notes) in Box 7


To find out more about how the DRC works in Xero read our Xero Central guide.

For more information on the DRC for the building and construction industry read HMRC’s notice here. 


May 3, 2020 at 9.56 am

Excellent blog! ?o y?u hav? any helpful hints f?r
aspiring writers? ?’m planning to start my own site s?on b?t I’m a little lost ?n everyt?ing.
Wou?? you sugge?t starting with ? free platform ?ike WordPress or
?o for a paid option? ?here ar? so many choices
out the?e that I’m complet?ly confused .. Any recommendations?

?hanks a l?t!

Beeny Atherton in reply to utton Xero
May 4, 2020 at 10.49 am

Hi – we’re so glad to hear you like our blog. We’re in fact online accounting software for small businesses so can’t really provide recommendations or advise on the best blogging sites to use.

David Ko
October 6, 2021 at 8.40 pm

Hi we have drc turned on in our system and we choose the option of drc but it does not show the final drc figure at the bottom of the invoice? How can we resolve this?

Xero in reply to David Ko Xero
October 7, 2021 at 4.26 pm

Hi David, can you please raise a case with our Support Team so we can take a closer look into this for you? Thanks! ^BA

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