After being delayed from 1 October 2020 to 1 March 2021, HMRC’s Domestic Reverse Charge (DRC) is finally just around the corner.
The charge is being introduced on VAT to combat the 100 million revenues that HMRC claim are being fraudulently misplaced in the construction industry. DRC is already in place in other UK sectors.
What is the domestic reverse charge?
At its most basic level, the DRC removes the ability of suppliers to charge VAT instead of customers self-accounting for VAT through VAT returns.
However, it is a little more complicated – it doesn’t cover all construction services. Businesses will need to know where and when the DRC applies to them. You must use it if you’re VAT registered in the UK, buy building and construction industry services, and:
- Payment for the supply is reported within the Construction Industry Scheme (CIS)
- The supply is standard or reduced rated
- You’re not hiring either staff or workers, or both
- You’re not using the end user or intermediary exclusions
The DRC won’t apply to zero-rated supplies of construction services, or end users as both the supplier and customer have to be both VAT and CIS registered.
If you’re wondering what counts as a construction service, the list includes extensions, demolition, heating installation, lighting, air conditioning, drainage, painting and decorating, and more. A full list can be found on the government’s website.
How to prepare
If you haven’t started getting ready for the DRC, now is the time. There’s a lot to do, including:
- Making sure your accounting accounting systems and software can deal with the DRC
- Considering if it will impact your cash flow
- Ensuring your staff responsible for VAT accounting know about the changes and how they work
Issues will arise if you don’t undertake DRC correctly. Incorrect assessments or under-declared VAT will result in penalties, and overcharging customers for VAT will sour your supplier-customer relationships.
It’s not all bad news if you get something wrong, though. HMRC has said that it won’t be too strict with genuine compliance mistakes in the initial six-month period when the DRC is introduced to allow for an adjustment period.
How can EasyBuild help?
Many of our clients will be affected by the DRC, so we will be organising regular briefings to keep you up to date with changes in our software.
If you have any questions or concerns in the meantime, please do not hesitate to get in touch with a member of our team.