Domestic Reverse Charge – New VAT rules for the construction industry.
From October 2020, HMRC will change the way it collects VAT from businesses working in the Construction Industry Scheme (CIS). Under the existing scheme, the VAT liability lies with the supplier of services, however the changes mean that the responsibility will transfer to the end recipient instead. It is estimated that the changes will affect up to 150,000 businesses in the construction and building sector.
The Domestic Reverse Charge (DRC) was announced in 2017 to combat VAT fraud in the construction industry, often called ‘missing trader fraud’ or Carousel Fraud – where contractors collect VAT and then disappear before paying HMRC.
Who is affected by the VAT reverse charge?
The changes will affect any construction services supplied where the recipient is not an end user, as well as any goods supplied during the service. This will affect all CIS registered businesses working as contractors, and the recipients of those services.
When does the reverse charge not apply?
The reverse VAT charge does not apply under the following circumstances;
- For zero-rated supplies of construction services.
- Where goods are supplied with no additional construction services.
- Supplies of services where the supplier and customer are connected in any way. This includes supply of services between landlords and tenants.
- For suppliers of specified services overseas – the changes only affect domestic transactions.
- Where the recipient is an end user and will not be making an onward supply of construction services.
How will the reverse charge work?
Under the new scheme, suppliers must issue VAT invoices showing that the services are subject to the reverse charge. The VAT should be clearly highlighted but not included in the total amount charged.
If the recipient of the service is VAT registered, instead of paying the VAT to the supplier, they will count it as part of their normal yearly VAT return.
The recipient is still able to recover the VAT amount as input tax under normal rules. This normally means they will be in a ‘nil net’ tax position with no VAT due to HMRC.
Important advice for CIS-Registered Businesses
To meet the new rules suppliers should;
- Validate subcontractors for CIS using the same process as usual.
- Ascertain the VAT status of customers registered for CIS.
- Collect and keep proof that the customer is not the end user of the service.
- If the customer is not VAT- registered, the existing 20% VAT charge is added to the total cost.
- If the customer is VAT registered and is not the end user of the services, the domestic reverse charge should be applied.
- Where there it is agreed that there is one DRC element in the supply process, the entire supply is subject to the charge. This will speed up the decision-making process for both parties.
To get your accounting software ready for the Domestic Reverse Charge speak to us on 0121 323 2304 or email us on email@example.com.