What is domestic reverse charge VAT?
DRC VAT is new legislation which came into force on 1st March 2021 to change the way CIS Construction businesses handle and pay VAT. It has been introduced as an anti fraud measure where companies are receiving high amounts from their customers with no intention of paying over the VAT element. It applies to VAT registered construction businesses who supply or receive construction and building services reported under CIS.
What does it mean?
In short, it basically means the customer (contractor - if VAT Registered) will be responsible for reporting the VAT to HMRC instead of the supplier (subcontractor).
If you are a CIS subcontractor you will no longer charge VAT to your customers, but you must state on your invoice that Domestic Reverse Charge applies and show the customer is responsible for the VAT including showing the correct VAT rate (5% or 20%) or VAT amount due.
If you are a CIS contractor, when you receive a Domestic Reverse Charge bill you will need to report this on your VAT return as both input and output tax.
When you must use the reverse charge
You must use the reverse charge for the following services:
constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not)
constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including things like walls, roadworks, power lines, electronic communications equipment, pipelines, reservoirs, water mains, industrial plant and installations for purposes of land drainage
installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
painting or decorating the inside or the external surfaces of any building or structure
services which form an integral part of, or are part of the preparation or completion of the services described above - including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
As a supplier - you must use DRC if you are a VAT registered business in the UK supplying building and construction industry services. The following conditions should also be met;
* Your customer must be registered for VAT, if they are not standard VAT rules apply.
* Payment for the supply is reporting under the CIS scheme
* The services are standard or reduced rate VAT (DRC is not applicable to zero rated supply)
* Your customer has not given you written confirmation they are an end user or intermediary supplier
As a customer - you must use DRC if you are a VAT registered business in the UK receiving building and construction industry services. The following conditions should also be met:
* Your supplier must be VAT registered and supply is at the standard or reduced rate
* Payment for the supply is reporting under the CIS scheme
* Your not using the end user or intermediary exclusions - if you are the end user or an intermediary you should notify the supplier in writing, and the DRC will not apply.
When you must not use the reverse charge
Do not use the charge for the following services, when supplied on their own:
drilling for, or extracting, oil or natural gas
extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements
installing seating, blinds and shutters
installing security systems, including burglar alarms, closed circuit television and public address systems
How might this affect your cash flow
As a supplier for the DRC you will have less cash coming in initially, as you will no longer be receiving the VAT element from your customers, so you will need to consider the impact on your short term cash flow. As you will have less VAT to pay over to HMRC you may find you are regularly receiving repayments on your VAT return, in which case you can apply to move your VAT returns to monthly and receive this quicker.
For further information, full guidance is here - VAT reverse charge technical guide - GOV.UK (www.gov.uk)
If you need further support or need help in recording the DRC within your accounting software, please contact us - redwoodbookkeepingservices@gmail.com
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