What is the VAT Domestic Reverse Charge (DRC)?
The DRC is a major change to the way VAT is collected in the building and construction industry.
If you are a VAT registered contractor or sub-contractor supplying and receiving services covered by the CIS scheme and liable to VAT at the standard 20% or reduced rate of 5% then you need to comply with the new rules from 1 March 2021.
The new rules take the responsibility of accounting for the VAT on construction services from the provider of the service and onto the business receiving them. The business providing the construction services will just be paid the net price without VAT, with the customer then paying over the VAT to HMRC on their VAT return.
For most customers in this situation, it will just be an “in and out” on their VAT return – there is no additional VAT in the supply chain – but it is a significant change to who pays the VAT and when. For sub-contractors who rely on VAT to fund their cash flow before accounting for it to HMRC, the impact could cause real issues.
There are a number of exemptions, but the general advice is that if a supply needs
to be reported through the CIS regime, it is likely to be subject to the DRC. The main exception is where the services are provided to an end user (e.g. the business that will eventually occupy a new building) in which case the normal rules apply. The challenge though sometimes may be working out exactly who the end user is in the supply chain.
HMRC have implemented these changes to combat fraud where VAT is invoiced, paid and collected but not handed over to HMRC. However, they are giving a 6 month “light touch” period for failing to comply but thereafter, will be issuing penalties and surcharges.
To prepare and ensure your business is compliant, our advice is to familiarise yourself with the new rules, to consider if cashflow in your business will be affected and also to understand how your accountancy software will account for these transactions.
Get your FREE information download
We have produced a free PDF download that contains more detailed information on VAT DRC, and how this may affect your business.
VAT Domestic Reverse Charge Information Leaflet
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If you have any questions relating to the support available for your business, please contact our experienced tax professionals and they will be happy to help.