Domestic Reverse Charge: Our 5 top tips
After being delayed twice, the new VAT Domestic Reverse Charge (DRC) went live on 1 March 2021. HMRC implemented the change to combat VAT ‘missing trader’ fraud in the sector, which is estimated to cost the Treasury £100m per annum. It is the most significant change to VAT in construction services in 30 years.
Our VAT team have seen several recurring issues with the DRC. Below, we will cover the most common issues affecting construction businesses, with our top tips on addressing them.
1. Businesses are incorrectly charging VAT
Firstly, if in doubt over whether VAT should be charged, we’re seeing that businesses will charge VAT as default. However, the assumption is that their customer can reclaim any VAT charged from HMRC. However, that leaves their customers at risk, as HMRC may not refund the incorrectly charged VAT.
Action Point: If you are being charged VAT within a supply chain, check to ensure you are comfortable that it has been correctly charged because it will be difficult to reclaim later.
2. Businesses are unaware if they fall within the Construction Industry Scheme
Under the Construction Industry Scheme (CIS), contractors deduct money from subcontractors’ payments and then pass it on to HMRC. The DRC has been linked into and only applies to supplies that fall within CIS. This has highlighted that currently, there are a number of construction suppliers and customers that should be CIS registered but are not.
Action Point: Check your CIS obligations. Many businesses do not realise they fall within the CIS and DRC’s scope.
3. Accounting software hasn’t been updated to account for the DRC
If you’re using older accounting software to process your VAT returns, it may not have been updated to account for the new changes. Hence, some accounting software is helpful at ‘remembering’ what codes you’ve used in previous returns. As a result, the old software may default to the same coding used in previous entries.
Action Point: Make sure the tax codes in your accounting software have been updated for DRC and that you are using the correct codes.
4. Lack of clarity around what is considered a construction service
While many widely accepted services fall under the remit of construction (building a wall, installing electrics, etc.), there are several ancillary services you may need to consider. HMRC has not published a definitive, comprehensive list, although examples that can be referenced are included.
Action Point: Ensure you understand which of your services fall under the definition of construction services.
5. Systems and workflows have not been adequately reviewed
Finally, with the effects of the DRC still impacting construction businesses, you must have good internal processes for dealing with the VAT accounting for your supply chain. In particular, we recommend all businesses have a workflow to deal with the DRC effectively.
Rather than one single comprehensive system, there should be two separate processes to review:
- Supplies you make to your customers
- Supplies you receive from your suppliers
These will vary depending on where your service sits in a supply chain and should be reviewed separately. If you don’t have systems already, make a flow chart on how construction supplies. Specifically, both made and received which should be dealt with.
Action Point: Review your systems and processes to ensure DRC obligations have been taken into account
How we can help?
Overall, if you are struggling to make sense of the Domestic Reverse Charge or complying with the new rules, our team can help. We can support you on an ad hoc basis, such as advising whether services fall in the scope, or on a project-based approach, including:
- Interactions within the CIS system
- Accounting software set-up and adaptation
- Systems reviews to ensure compliance
If you have questions about the VAT domestic reverse charge, please get in touch with our tax team at 01903 234094.
