Domestic Reverse Charge VAT in Construction
Are You Ready?
The Domestic Reverse Charge (DRC) will come into play on 1st March 2021 and will mark a significant change in the way VAT is accounted for within construction sector supply chains.
In very simple terms, when a transaction is covered by the new rules, the customer rather than the supplier will account for the VAT on the transaction, to HMRC. As the supplier will invoice Net of VAT, they will no longer receive that element of the transaction when the customer pays.
Deferred twice from October 2019 due to the challenges of Brexit and Coronavirus, the new process is an anti-fraud measure designed to counter organised criminal attacks on the UK VAT system. By moving the VAT charge down the supply chain, HMRC intends to stamp out this kind of fraud.
While the changes may appear straight forward, businesses must take time to understand the complexities of how it will impact them, and the actions they must take to prepare for it. Many have prudently made the necessary adjustments already, but for those who have not, now is the time to act.
What to Consider
The first step is of course to fully understand where you sit in the supply chain, and how that impacts your business in relation to the new process. There are some exemptions, but as the rules cover a very broad range of construction services, it is highly likely that you will need to be prepared.
End users, main contractors and sub-contractors will need to understand their place in the chain, and their respective responsibilities to ensure that they are compliant.
Accounting software packages may need to be adapted (or implemented) to accommodate the reverse charge.
Any staff with responsibility for VAT accounting will need to be familiar with the reverse charge and will also need to be able to competently identify relevant CIS Contracts and End-Users.
There will inevitably be some initial confusion over which services the charge covers, but broadly speaking, where there is a reverse charge element in a supply then the whole supply may be subject to the domestic reverse charge.
Subcontractors will no longer receive the interim cashflow benefit of the VAT on their sales invoices and will need to budget for this. These businesses (and their customers) may need to review payment terms to avoid disruption.
Those at the start of the supply chain may become VAT repayment claimants and should consider making a change to file monthly returns.
The new rules may seem daunting, especially in a time when businesses are at various stages of readiness for Making Tax Digital and the changes to IR35 coming in April.
What is essential now is that every affected business undertakes a full analysis of their processes, systems, and most importantly the nature of their specific interactions with their customers and suppliers, and make sure that they account for these correctly.
And for those businesses that need additional support, seek professional advice.
Needless to say, most will be eager to know what plans the Chancellor will unveil in his imminent Budget. Which government support incentives will be extended, and for how long? Some may even be hoping for a further deferral of the Domestic Reverse Charge. The general consensus is that this is unlikely, especially since it will already be in effect prior to the Budget, albeit by a matter of days.
And if it is deferred again, perhaps those who are not yet fully prepared have one final opportunity to make the necessary plans to be ready.