VAT Domestic Reverse Charge for Construction Services
Heard about the VAT domestic reverse charge (DRC) and wondering what all the fuss is about? Don’t worry, it sounds more complicated than it really is. Basically, it’s a rule change in how VAT is handled in certain industries, like construction. It’s mainly there to stop tax fraud, but it also means businesses need to pay a bit more attention to their paperwork.
Want to know what you need to be aware of? Read our blog for everything you need to understand about DRC.
What is VAT Domestic reverse charge (DRC)?
Under this system, the responsibility for accounting for VAT shifts from the supplier (the subcontractor) to the customer (the contractor or business receiving the services), meaning the end customer receiving the construction services has to pay the VAT to HMRC instead of the supplier.
This of course only applies if both the supplier and end customer are registered for VAT and so if the end customer is a private domestic one, then the DRC does not apply as the individual will not be VAT registered.
When to apply the VAT domestic reverse charge
The DRC will apply for most supplies of building and construction services and the charge will apply to standard and reduced rate VAT services. HMRC have issued an extensive list of the services covered here www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
If you are a supplier of building and construction industry services and are registered for VAT in the UK, you must use the reverse charge if:
- Your customer is also registered for VAT in the UK
- Payment for the supply is reported within the Construction Industry Scheme (CIS)
- The services you supply are standard or reduced rated
- You are not an employment business supplying either staff or workers, or both
- Your customer has not given written confirmation that they are an end user or intermediary supplier
How to record the domestic reverse charge
Once you have established that the end customer falls into the criteria above, and has a valid UK VAT number and is registered under the Construction Industry Scheme, you will next need to confirm whether your accounting software has the capabilities to record such domestic reverse charges.
When these are in place you will need to ensure that your invoices show the DRC applies. As per the example below:
When supplying a service subject to the DRC, suppliers must show all the information required on a VAT invoice and make a note on the invoice that the DRC applies and that the customer is required to account for the VAT. You will also need to clearly state how much VAT is due under the DRC, or if this amount cannot be shown, state the rate of VAT, but do not include the VAT in the amount charged to the customer.
If your software cannot show the amount of VAT to account for under DRC, you must add wording to the invoice to say ‘customer to account to HMRC’ for the domestic reverse charge and make sure the customer can identify domestic reverse charge goods or services.
How to record on your VAT Return
When preparing the VAT return, suppliers must not enter any output tax on sales under the DRC (in box 1). The supplier only needs to enter the net value of the sales in box 6.
On purchases, when buying services subject to the DRC you must add the VAT charged to the output tax total (box 1). You do not enter the net value of the purchase as a net sale (box 6). You may reclaim the input tax on your DRC purchases, subject to the normal VAT rules (boxes 4 and 7). Therefore the VAT will appear in both boxes 1 and 4 and net each other off.
At AMR Bookkeeping we understand that taking care of taxes can be bemusing and overwhelming but we are here to help answer your questions and make sense of it all.
www.gov.uk/guidance/vat-reverse-charge-technical-guide#how-to-account-for-the-reverse-charge
