Domestic Reverse Charge VAT for the construction industry

Domestic Reverse Charge VAT for the construction industry

From 1 March 2021 the introduction of the Domestic Reverse Charge VAT legislation has significantly changed the way in which VAT is accounted for in the construction industry.

In this article we aim to clear up any confusion and help you gain a clearer understanding of the new legislation.

What is the Domestic Reverse Charge VAT?

The Domestic Reverse Charge VAT legislation is a change in the way Construction Industry Scheme (CIS) construction businesses handle and pay VAT. The DRC does not apply to construction materials supplied separately and independently of any construction services. It applies only to transactions that are reported under the CIS which are between VAT-registered contractors and sub-contractors.

The scheme means those supplying construction services to a VAT-registered customer no longer have to account for the VAT. Instead, the customer accounts for it and it is considered input tax for them, as if they’ve made the supply to themselves.

According to the DRC the end-customer now accounts for VAT and the supplier of construction services does not. Now, the customer receiving construction services has to pay the VAT directly to HMRC instead of the supplier, and the end-customer recovers VAT subject to the normal rules set by HMRC.

Why is it being introduced?

The intended outcome of the DRC is to reduce VAT fraud in the UK construction industry, especially whereby construction businesses charge VAT for the services they supply but then disappear without paying their VAT bill.

How to work out if the DRC applies to you

The new rules apply to standard rate VAT or reduced-rate construction services provided by VAT registered businesses. The DRC does not apply to supplies of services which are zero-rated, such as the construction of housing. If you don’t make an onward supply of construction services, you are the end customer and normal VAT rules apply.

In the case of contractors supplying services, there are five key questions to ask. If the answer to the first four questions is yes and no to the final question, the DRC will apply and no VAT will be charged on sales invoices for the job in question, and the customer should account for VAT instead.

  1. Is the customer registered for the Construction Industry Scheme (CIS)? 
    If the answer to this question is no, the builder does not need to worry about the DRC rules for this customer and can follow normal VAT accounting.

  2. Is the customer registered for VAT?
    This can be confirmed using HMRC’s VAT number checker service. It is advised that you use this service to make sure that you are charging VAT on a job that is subject to normal VAT rules. If you don’t then HMRC might raise an assessment for underpaid output tax.

  3. Is the work within the scope of the CIS? 
    All traditional building services - such as electricians, plumbers, bricklayers, decorators, etc. - are included under the CIS. If in doubt, HMRC has published a useful guidance on the CIS.

  4. Is the work subject to either 5% or 20% VAT?
    Any zero-rated sales are excluded from the new DRC regime.

  5. Is the customer an end user or intermediary supplier for the work?
    The DRC only applies if the customer makes an onward supply of construction services to their own customer: for example, a subcontractor, contractor and customer arrangement. In cases where the contractor is not supplying on the construction services, the work is excluded from the reverse charge. This can happen in cases where:

    - The customer is an ‘end user
    This would be relevant at a property that the customer owns and rents out. In other words, the service is not supplied on by the builder receiving the services. The onus is on the customer to tell the builder if it is an ‘end user’ for any job. If so, VAT will be charged in the normal way by the builder.

    - The customer is an ‘intermediary supplier
    This is a business that is registered for both CIS and VAT that is connected or linked to end users. The connection is based on s1161, Companies Act 2006.

A link exists if both the intermediary supplier and the end user have a relevant interest in the same land where the work is taking place (like a landlord and tenant arrangement). So, even though the intermediary supplier is making an onward supply of construction services to the end user, the supplies it receives from other builders will be subject to normal VAT rules rather than the DRC.  

Still confused?

Why not speak to one of our knowledgeable accountants to discuss the impact of this new legislation and if the Domestic Reverse Charge VAT rules apply to your business. Call us on 01202 755600 or email hello@asfb.co.uk.

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