Coming into force from the 1st October 2020, is the Domestic Reverse Charge VAT. A new change in legislation, the VAT domestic reverse charge for building and construction services is a change in how VAT is handled for certain kinds of construction services in the UK. A significant change, this new legislation will affect the way that suppliers and customers conduct transactions.
Concerning the way that two UK VAT registered companies complete work in the construction sector, we recommend that you get ahead and view the CIS rules ahead of the launch.
By familiarising yourself with the new Domestic Reverse Charges for construction services, you can prepare yourself, while making sure that you have taken all the necessary steps required before the launch this October.
What is the Domestic Reverse Charge VAT?
The Domestic Reverse Charge has been introduced by the HMRC as a way to combat VAT fraud. It is thought that missing trader VAT fraud within the construction industry has accumulated to £100 million missing revenue every year.
With the DRC in effect within different industries, the construction industry, which is more complex and poses a greater challenge when implementing the Domestic Reverse Charge, will see this legislation finally come into force on the 1st October.
What is missing trader fraud? Missing trader fraud is where a supplier charges VAT to a client for their construction services, collecting the VAT. Instead of choosing the declare this collected VAT and paying it to HMRC, they instead disappear with the money.
Why was the Reverse Charge VAT delayed?
Up until early September, this new change of legislation was expected to come into force on the 1st October 2019. With the construction industry scrambling to prepare themselves for the latest changes in VAT, this postponement in legislation has been seen as a victory for many.
But why was the Domestic Reverse Charge VAT delayed? This new legislation had highlighted many worries and concerns, particularly with the current economic climate and ongoing Brexit.
This postponement of 12 months was agreed by the government, giving the construction industry the opportunity to become fully prepared for the change in VAT and make sure that there is enough time to put the correct practices in place.
Seen as a construction chaos, one of the biggest arguments from trade associations within the UK’s construction industry, was that the charge could lead to a spike in company insolvencies.
How does DRC affect you?
The VAT reverse charge for construction is effectively an extension of the Construction Industry Scheme (CIS) and applies only to transactions between VAT-registered contractors and subcontractors who are registered for the CIS.
Since this new legislation applies between two UK VAT registered companies, any transaction completed after the 1st October with VAT codes for EC goods and services, then the new DRC legislation cannot be applied. The rules also state, that if one item on an invoice is subject to DRC, then the whole invoice will be subject to the Domestic Reverse Charge.
This is because the entire transaction can either be DRC applicable or not, and you are unable to mark certain lines as DRC, on a line by line basis.
The CIS, Construction Industry Scheme, the basis from which the government has determined if the DRR can apply to invoices, has decided that only transactions where CIS have been added can DRC then be applied.
What can VAT Domestic Reverse Charge be applied to?
The new Domestic Reverse Charge VAT can be applied to:
- Subcontractor transactions (Direct and Certificate)
- Client Transactions (Direct and Certificate)
- Supplier Transactions (CIS only)
- General Ledger VAT Journals (input only)
VAT registered Customers
The scheme means that those supplying construction services to a VAT registered customer will no longer have to account for the VAT. Instead, the customer will account for the VAT (that is, it will be considered input tax for them, as if they’ve made the supply to themselves).
In even simpler terms, for services they provide, subcontractors will require the contractor employing them to handle and pay the VAT directly to HMRC. The payment received will be for the cost of the work done (plus materials used).
What should you do?
It is important that Customer reviews their supply chains to consider how they will be impacted by the changes. It is important to identify the categories of supplies which may be subject to the new “reverse charge” rules, and send out the appropriate communication to their supply chain.
Although the date was deferred for this legislation, EasyBuild Construction Software were ready for the change, therefore if you are looking for a Construction software which is MTD and DRC ready EasyBuild should be the software of choice.
Along with preparing and learning about how these changes can affect your VAT and business, it should also be noted that HMRC is aware that this is a new concept for many businesses within the construction industry and will be applying a soft approach to these new changes in regulation for the first 6-months.
For more information and to discover how DMR will affect your business, we have put together a EasyBuild User Guide, explaining Domestic Reverse Charge for our clients. EasyBuild – DRC VAT User Guide_Sept 19
We also recommend that clients refer to section 6 of the User Guide for more information on the impact of this legislation when completing their VAT return.
There may be specific custom reports which will need amending to support these changes. Please contact our Professional Services team on firstname.lastname@example.org to book a time when your reports can be scheduled to be amended. Due to the number of customers, we will be scheduling on a first come first serve basis.
If you are after a more detailed breakdown of how the changes have been captured in EasyBuild please visit the following EasyBuild – DRC VAT User Guide Sept 2019
For more information, please visit: HMRC: Domestic Reverse Charge VAT