HMRC has delayed the introduction of the Domestic Reverse Charge (DRC) to October 1st 2020 in order to combat missing trader fraud within the building and construction industry.
This major change will affect all contractors and sub-contractors within the industry, with VAT no longer being charged between one contractor and another.
This was originally meant to be coming into force on the 1st October 2019, however, as industry representatives have raised concerns that some businesses are not ready to implement the charges it has been delayed for a further 12 months.
From October 2020, a building contractor receiving a service from a supplier will have to charge itself (or “reverse charge”) the VAT on services received and pay HMRC directly, rather than paying the supplier.
The aim of this measure is to prevent suppliers of building services along the supply chain collecting VAT from their customers, then disappearing and leaving HMRC out of pocket.
How it works
Under the new rules, a VAT-registered business, which supplies certain construction services to another VAT registered business (that is not the end-user), will be required to issue a VAT invoice stating that the service is subject to the reverse charge, at the appropriate rate (5% or 20%).
The customer must then account for the VAT on that supply through its VAT return, instead of paying the VAT to the supplier. The customer may then recover the VAT amount as input tax, subject to the normal rules.
The new rules do therefore not affect the end-user, usually a property owner or developer, who will be charged VAT by their contractor as normal.
Services affected by the domestic reverse charge
The reverse charge will affect supplies of building and construction services supplied at the standard or reduced rates that also need to be reported under the Construction Industry Scheme (CIS). These are called specified supplies. Among those included are construction, alteration, repair, extension, painting and decorating, demolition of buildings, civil engineering and installation of heating, lighting and air-conditioning.
There is an important difference between CIS and the reverse charge where materials are included within a service. The reverse charge applies to the whole service, whereas CIS payments to sub-contractors are apportioned and no deductions are made on the materials content.
The domestic reverse charge will apply to specified services unless:
- The services are supplied to an end-user, such as the property owner, or directly to a main contractor that sells or lets a newly completed building
- The recipient makes onward supplies of those construction services to a connected company
- The recipient is not VAT registered or required to be VAT registered
- The recipient is not registered for the CIS
- The supplier and recipient are landlord and tenant or vice versa, or
- The supplies are zero-rated.
What actions do I need to take?
HMRC understands that implementing the domestic reverse charge may cause some difficulties and will implement a “soft landing” period for the first 6 months. During this period, they will apply a light touch with regards to any errors made, as long as you are trying to comply with the new legislation and have acted in good faith.
To get ready for the change, construction businesses should now:
- Review supplies made to and received from other VAT registered contractors to establish whether the domestic reverse charge will apply
- Identify what customers are an end-user and obtain confirmation of their VAT registration and CIS status.
- Ensure their current accounting systems can deal with the legislation change
- Consider the impact on cash flow
- Review the VAT scheme they are currently using especially if it is the Cash Accounting or the Flat Rate Schemes