The VAT domestic reverse charge (DRC) for the construction industry is new legislation that came into effect on 1 March 2021, having previously been delayed from 2019 and then October 2020 by HMRC.
What is the VAT domestic reverse charge?
The VAT domestic reverse charge is a new way of accounting for VAT in the construction industry. It applies to VAT registered construction businesses and is an anti-fraud measure designed to counter sophisticated criminal attacks on the UK VAT system. It intends to cut down on “missing trader” fraud, where companies receive high net amounts of VAT from their customers but have no intention of paying the VAT to HMRC.
It does not apply for services supplied to non-VAT registered individuals or businesses, which means work done for homeowners/domestic users should be invoiced in the usual way.
It also does not apply to work done overseas. It only applies to UK companies providing building and construction services in the UK.
What does it mean for you?
If your business is part of the Construction Industry Scheme then you will be affected by the legislation, so it is important you know how it will affect your business and processes as DRC is a mandatory requirement from HMRC.
If you are a VAT registered subcontractor (supplier) who provides building and construction services to a VAT-registered contractor (customer) who is CIS-registered, then you no longer need to account for the VAT. Instead, your invoice should inform your customer that the VAT reverse charge is applied, and they are responsible for the VAT using the reverse charge procedure.
If you are a VAT-registered contractor (customer) you will instead account for both input and output tax on invoices you receive from your VAT-registered subcontractors.
Xero is ideal for trade and construction businesses. It helps put accounting tasks on autopilot, with automatic reverse charge VAT and CIS calculations on bills, invoices and credits. Plus, as it is cloud-based it allows you to manage your business finances, track jobs and pay your staff from anywhere – at home, in your van or on site. If you are not yet using Xero for your construction business, now is the ideal time to start or switch.
For more information please get in touch on 07964103460 or request a call back on my website Blog | Bayliss Accountancy Services