Ross McConnell - Kinross Based Chartered Accountant

Domestic Reverse Charge

by ROSS MCCONNELL on JULY 01, 2019

Tax needn’t be taxing… but the Domestic Reverse Charge might be an exception

If you work in the construction sector then HMRC’s new Domestic Reverse Charge (DRC) regulation means there is a good chance you will find the new VAT requirements a bit taxing to understand, let alone implement correctly.

What is DRC?

From 1 October 2019 DRC applies to qualifying work under the Construction Industry Scheme (CIS), which includes:

· Groundworks or other preparatory works

· Construction alterations and the repair of buildings

· Installation of any heat, light or power systems

· Internal and external painting and decorating.

Why is the change being introduced?

It’s all about tax evasion. HMRC believe that more than £100m was being lost to the revenue every year through missing trader evasion: that’s when a subcontractor charged labour plus VAT to the main contractor, was paid in full, but then ‘disappeared’ before paying the VAT element due to HMRC.

Under the new DRC regulation, the VAT will be paid direct to HMRC by the relevant ‘customer’ within the supply chain (which excludes the end client).

An example

If a business customer employs a main contractor to refit their office then the main contractor will now pay any VAT due on the invoices submitted by their subcontractors direct to HMRC (at both standard rate or reduced rate). The VAT-registered subcontractors will receive only the net amount of their invoice directly.

Put another way, from 1 October if you’re the sub contractor your invoices will just state that your services are subject to the reverse charge, and no vat will be added. The main contractor will then pay the vat element to HMRC, rather than to you.

The change in the law does follow consultation with the construction sector last year, but the practical impact will undoubtedly cause some challenges in the early months, whether you’re the main contractor in this scenario or a sub contractor.

Good news however if you’re the end client whose business is being refurbished in my example: as the end user the new regulations don’t impact your invoice and you’ll carry on as before, paying VAT to the main contractor who will be responsible for paying that on to HMRC.

There are some exceptions to this new rule, and obviously if the service involved is zero rated then the new regulation doesn’t apply, but it’s just one more

complication to make life more difficult for subcontractors.

That’s where we come in; we can help whether you’re looking for advice on how to amend your invoices, systems or VAT return. For example, the new regulation doesn’t apply to the work of the architects, or any services supplied directly to the end user of the building (hence the main client still pays VAT to the main contractor). It also doesn’t apply within a group of businesses all owned by the same parent company, (eg the internal charging between J Blogs (Plumbing) when working directly to J Blogs (Contracting)), or where the supplier and customer are actually landlord and tenant.

Clear as the mud on a construction site after a heavy fall of rain?

Don’t wait for October, anyone in the construction industry can contact us now to get more guidance on this new rule and how it will apply to any projects you have on.

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