VAT Domestic Reverse Charge – What does it mean for the construction sector?

It’s now less than 2 months before a significant change will affect most businesses in the construction sector. From 1 October 2019, the new Domestic Reverse Charge (DRC) for construction services will take effect. HMRC have advised that the changes are designed to combat missing trader VAT fraud in the construction sector.

Who will be affected?
The DRC will affect individuals and businesses that are registered for VAT if they supply or receive services that are reported under the Construction Industry Scheme (CIS).

How does the VAT DRC operate?
The implementation of the DRC means that the customer receiving the supply of specified construction services must account for the VAT due rather than the supplier. In turn, the customer deducts the VAT due on the supply as an input, meaning no net tax is payable to HMRC.

What supplies will be affected?
The DRC will affect supplies at the standard or reduced VAT rates where payments are required to be reported through CIS. Supplies between sub-contractors and contractors will be subject to the reverse charge unless they are supplied to a contractor who is an ‘end user’.

An end user will usually be a recipient who use the building or construction services for themselves, rather than selling the services on as part of their business of providing building or construction services.

How will it be invoiced?
When making a supply to which the DRC applies, suppliers must:

• show all the information normally required to be shown on a VAT invoice; and
• annotate the invoice to make clear that the DRC applies and that the customer is required to account for the VAT.

The amount of VAT due under the DRC should be clearly stated on the invoice, but should not be included in the amount charged.

How does this affect mixed suppliers?
The legislation is designed so that if there is a reverse charge element in a supply, then the whole supply will be subject to the DRC. This is to make it simpler for both supplier and customer, and to avoid the need to apportion or split out the supply.

You can read the flowchart, designed by HMRC, to help assist you decide whether the DRC will apply to you here.

HMRC understands that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, however it is important to prepare for the change.

If you would like any advice on the new Domestic Reverse Charge, please email our EQ Property & Construction team at info@eqaccountants.co.uk or contact one of our offices.