Domestic Reverse Charge (DRC)
The VAT domestic reverse charge (DRC) for construction from 1st October 2019
The need to need to know
The new rules remove the current requirement for VAT to be charged on sales invoices from one contractor to another.
The most common fraud in the building industry from HMRC’s perspective is missing trader fraud committed by subcontractors that provide labour for construction services. HMRC estimates that more than £100m a year is lost by this and similar types of fraud
The simplest way to remove fraud is to remove the ability to charge and collect VAT from the participants; that way there is nothing to defraud.
In the 2017 Budget HMRC announced a consultation to seek opinion on the introduction of the VAT domestic reverse charge (DRC) for construction services. Following this exercise, legislation was passed, with the rules coming into effect on 1 October 2019.
What changes are taking place?
The DRC does not apply to the zero rate; only to supplies at the standard and reduced rates. If there are qualifying and non-qualifying supplies the DRC can apply to the whole supply. The DRC should not affect VAT recovery. Suppliers will need to check if the customer is VAT registered.
It will only apply to charges in the chain of supply and not to end users. End users are those that do not supply building and construction services. Who is an end user may not always be obvious to the contractor, the onus is on the end user to declare that it is. If not, the DRC will apply, which may result in an unexpected cost to the end user.
VAT invoices will need to show more details:
- They need to state that the reverse charge is due
- The value of the DRC, the VAT rate applicable and the VAT due will need to be shown (but not charged and paid over to HMRC).
What you need to do?
This is a change to the way contractors account for VAT, so your systems may need to be changed to deal with it. The change does not take effect until 1 October, there is time to ensure that your systems are set up to report it and recognise when it is applicable (or not).
If you are unsure whether your current Accountants are prepared, come and talk to us, do not get caught paying 20% more than you need to.
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