Domestic Reverse Charge for VAT

Effective 1^st March 2021

The UK Government has introduced a new VAT domestic reverse charge scheme for those operating under the Construction Industry Scheme (CIS) which will come into effect on 1^st March 2021.

The new changes will apply to all standard/reduced rate supplies for VAT registered businesses and individuals in the UK that operate under CIS. Zero rated supplies (i.e. construction of new builds, disability etc) will not be affected by the changes.

If you are a contractor who uses subcontractors or a subcontractor that supplies services to a contractor, then the VAT Domestic Reverse Charge may apply to you.

If you are not VAT registered or operate under CIS, then the new rules do not apply to you.

How does it work?

Currently, as a contractor who employs VAT registered subcontractors, they will charge you 20% VAT on their invoice. You reclaim this money as a cost through your VAT return.

For subcontractors, you charge your contractor 20% on your invoice and this money is paid to HMRC through your VAT return.

Under the new scheme, subcontractors do not charge VAT to contractors, therefore do not need to pay this to HMRC through their VAT return.

Similarly, contractors would not pay VAT to the subcontractors, and therefore would not claim this money as a cost through their VAT return.

An example of how the reverse charge would work in practice is:

Brian the subcontractor is hired by Gary the contractor for building work that costs £2,400 including VAT. This is made up of £2,000 costs plus VAT at 20% – £400.

This work is a business-to-business supply, so it falls under the reverse charge regulations.

Under the current (standard VAT) rules, Brian invoices Gary £2,400 and includes the £400 on his VAT return as output (sales) tax in box 1.

Gary then claims input (purchase) tax of £400 in box 4 of his VAT return and records the net supply of £2,000 in box 7.

Under the new rules, Brian would invoice Gary for £2,000 only. Gary must then record the £400 in box 1 of his VAT return.

Who does the scheme apply to?

The scheme applies to all VAT-registered businesses and individuals in the UK who operate under the CIS scheme, who make supplies at 20% or 5% VAT, and are not providing services to an end user (more information on this further down the article).

How do I know if I need to apply Domestic Reverse Charge for VAT?

If all of the following statements apply, then you must use DRC for VAT. If any of the following do not apply, then you don’t need to use DRC for VAT:

• The supply of services falls within the Construction Industry Scheme (CIS)
• The supply of services is either a 20% or 5% supply
• The customer is VAT registered
• The customer is CIS registered
• The customer has not confirmed they are an end user

What is an end user for Domestic Reverse Charge VAT?

An end user is classed as someone who uses construction services for their own use and are not sold as part of their business. Examples of this are:

• Property developers / landlords
• Housing Associations
• Domestic customers

When do the new regulations not apply?

Domestic Reverse Charge for VAT will not apply if:

• Either one or both of the contractor/subcontractor is not VAT registered
• The supply does not fall under the CIS scheme
• You are making zero rated supplies.
• You are carrying on work outside of the UK
• The supply is being made to an end user.

What you need to do under DRC VAT

Once you have established whether the supply falls under the new regulations, there are some small changes you need to apply.

If you are a subcontractor charging for your services and you have determined the supply is under DRC VAT:

• From 1^st March 2021, you must not charge VAT on your invoices to your contractor
• You must state on your invoice that the supply falls under DRC VAT, and the recipient of the invoice must account for the VAT on their VAT return
• You must state the amount of VAT that is due under the new regulations. This will be the normal amount you would have charged before 1^st March 2021.

As a contractor:

• From 1^st March 2021, you must not pay VAT on your invoices from your subcontractors only if the supply falls under the DRC regulations
• Your subcontractors invoice must not include VAT and must state that the supply falls under DRC VAT
• You must now account for the VAT on your VAT return
• If you receive an invoice that does not meet the criteria above, we would advise you liaise with your subcontractor until such an invoice is received.

To finish

The new Domestic Reverse Charge for VAT is a change that will affect many businesses and individuals in the UK.

The key things to remember are:

• The new regulations only affect those who are VAT and CIS registered
• It only applies to work that is subject to VAT at 20% or 5%. Zero rated and exempt services will not be affected.
• The responsibility lies with the customer to pay the VAT to HMRC.
• Invoices must state that the service is subject to DRC for VAT regulations.
• It only applies to services/supplies completed on or after 1 March 2021

HMRC have created a couple of flow charts to help you decide if you need to use the reverse charge:

• If you sell building and construction services
• If you buy building and construction services

Full guidance on the scheme can be found on HMRC’s website.