Changes in VAT for the Construction industry – The Domestic Reverse Charge
15th February 2021
Do you work in the construction industry? If yes, the Domestic Reverse Charge (DRC) is set to commence on 1 March 2021
You may recall the DRC had previously been set to be introduced on 1 October 2019, was postponed until 1 October 2020 and then was further was delayed until 1 March 2021 due to the impact of Coronavirus. In the absence of any last minute announcements, this is set to go ahead so it is important you re-familiarise yourself with the rules.
What is the Domestic Reverse Charge and who does it apply to?
The DRC is a measure introduced to prevent VAT fraud in the construction industry. It removes the payment and recovery of VAT in the construction supply chain. VAT will now only be paid once, by the “End User”, with each subcontractor in the supply chain charging themselves and recovering the VAT under the Reverse Charge mechanism.
Take a look at our factsheets which show the steps required whether you are purchasing construction services or supplying them:
From 01 March 2021, invoices raised between two CIS registered businesses will no longer have VAT charged on services and materials provided – unless the client is an end user.
Suppliers to contractors need to be prepared for a hit to cashflow. They will no longer be paid VAT by the customer. Currently VAT is paid by the customer and then only paid over to HMRC on the next VAT Return, which could be up to four months later. For many small businesses, this may have provided valuable working capital which will now need to be found elsewhere.
Customers have to be cautious regarding paying purchase invoices which include VAT. Should your subcontractor incorrectly charge you VAT and you pay, HMRC will not allow the reclaim for ‘input’ VAT on your VAT return and so instead you would need to request the subcontractor credit note and repay you the VAT element.
What action to take?
Notify all team members involved in the sales and purchase functions.
Sales teams need to identify whether the customer is an “end user”. If so VAT should be charged as normal. If they are a contractor, VAT registered and CIS registered and construction services are being provided, VAT should not be charged. However, you still need to provide information of what the VAT would have been. This should be agreed with the contractor to avoid confusion and should be communicated to the accounts team so correct invoices are raised to customers.
Contractor purchase teams and directors signing off expenditure for construction services will need to carefully check any VAT applied on purchase invoices. They will need to check whether the supplier is VAT registered and CIS registered and if so, ensure not VAT has been charged.
Consider amending purchase order forms, sales invoice request forms, quotes, and customer contracts to collect this information.
Train accounts staff on using the reverse charge functionality within your accounting software. Our teams can help with this or you should contact your software provider.