VAT is simple, right? Err no, sorry! VAT has some complex bits, and if you’re in the construction business, one of those complex bits is the domestic reverse charge (DRC).
Introduced by HMRC in 2021, the DRC is still a relatively new charge that still confuses those who use it. Luckily for you, we have a firm grasp of what the charge is and how it affects construction businesses. Here’s a breakdown of what you need to know.
What is the Domestic Reverse Charge (DRC)?
The VAT domestic reverse charge changes how VAT is managed for specific construction services and related materials. It extends the Construction Industry Scheme (CIS) to VAT-registered contractors and sub-contractors involved in CIS-reported transactions.
Under this scheme, the responsibility to account for VAT shifts from the service supplier to the VAT-registered customer, making the customer liable to pay the VAT directly to HMRC.
Need some help with VAT and DRC?
We provide bespoke advice to many construction businesses. Get in touch at [email protected].
When does DRC apply?
The VAT domestic reverse charge must be used for most supplies of building and construction services to other construction businesses, but not all (because HMRC likes to keep us on our toes). Make sure you know what criteria you fall into, so you don´t get caught off guard by these rules!
The Reverse Charge applies to any VATable service, whether it is standard rated or reduced rate, where:
- The supplier and customer are registered for VAT in the UK, so this only applies to business customers and not to domestic or non-VAT-registered customers.
- Payment for the services is reported within the Construction Industry Scheme. i.e. the customer is registered for CIS – the Construction Industry Scheme tax scheme.
- The customer is not the end user, and it is normal for construction businesses to confirm in writing, ie email or in the contract, if they are or are not the end user.
To put it simply, there is a long list of services for which you MUST use the DRC and a shorter list of services for which you don´t—and supplying staff for a construction business is a special case! You can explore these lists and the specifics of applicable services below.
Useful resource:
This is HMRC´s guidance for the DRC for building and construction services. Although this is a simplified guide, it is their advice(!), and there are several detailed HMRC guidance notes included.
Essentially, when it comes to construction, if you are constructing or installing any works, or painting any works, you must use the DRC. However, activities like drilling, mining, and manufacturing, as well as services provided by architects, signwriters, creative artists, or those involving the installation of furniture or security systems, are exempt from the DRC.
What do you need to do to comply with the DRC for construction services?
This is probably the most frequently asked question we get from our construction clients at the moment, so we thought we´d cover it in this guide as well – especially since the answer is a pretty simple one!
To comply with the DRC, you need to:
- Don’t charge VAT on your sales invoice, and;
- Add a statement on the face of your sales invoice that you are applying the domestic reverse charge.
Seriously, that´s it.
It´s also really simple when you´re buying services subject to the reverse charge too. You just need to add the VAT charged to the output tax total on your VAT Return.
What accounting systems do I need?
Of course, one issue might be the admin and organisation you or your accounts team need to do to make all this happen. So here is our advice.
We recommend Xero accounting software for small and medium-sized businesses. This programme easily streamlines the invoicing process from issuing sales invoices to receiving purchase invoices, without any issues.
While software can help automate a lot of the process, there is still the challenge of checking each of your customers. For example, your accounts team will need to check that your customer:
- has a valid VAT number,
- is registered under the CIS scheme,
- is not the end user.
I need help with DRC
If you need help with the technicality of VAT or just getting your accounting processes up to speed for the DRC, then please get in touch with us at [email protected].
