What is changing?
Do you supply relevant construction services? If so, the new Domestic Reverse Charge (“DRC”) means you may have to change the way you account for VAT.
When will it apply?
From 1 October 2019! Less than one month away! Actually NO – it has just been delayed till 1 October 2020 which is great news for businesses that may be affected.
Does it apply to you?
So what does it mean – relevant construction services?
In simple terms it applies to those supplying services in the construction and building sector. For more detail keep reading. It doesn’t apply to the end user of the services. Nor does it apply if you are not VAT and CIS registered. In those situations VAT is dealt with in the usual way.
Construction industry scheme (“CIS”)
Given the fact that the legislation for DRC relies on definitions from the CIS scheme it is important to know about CIS as well. CIS and DRC are important legislation and should not be ignored.
As a brief overview- professional services, such as architects and surveyors, are not usually caught by CIS as long as the services they provide are within their normal professional work. If they venture past their advisory role and start supervising the workforce and being more involved in the build work then they may be caught.
Making repairs to existing systems is not usually caught whereas installing new ones is. Installing burglar alarms, shutters and blinds not caught.
Painters and decorators however are caught by CIS. Plumbing and electrical work is usually caught although if they are repairing then may not be caught.
Don’t take our word for it though as there are lots of different scenarios and we can’t list them all so check for yourself or ask your accountant. Here is a link to the CIS guidance from HMRC https://www.gov.uk/government/publications/construction-industry-scheme-cis-340/construction-industry-scheme-a-guide-for-contractors-and-subcontractors-cis-340#appa
Does DRC only apply to supply of services?
Mainly yes but please note that unlike CIS, the DRC also applies to materials and goods that are provided in conjunction with the service.
Why is this being introduced?
It resolves the following problem – the supplier charged VAT on their supply to you and you then claim it back on your VAT return. However, that supplier shuts his business after charging you VAT but without ever paying that VAT to HMRC. A lot of tax is lost in fraud within the services sector in this industry so HMRC are tackling it.
How will VAT be accounted for?
VAT registered and CIS registered businesses who receive an invoice dated on or after 1 October 2020, for services provided by another party, which they then supply onwards to someone else – should not pay VAT to the supplier on that invoice. Advise the supplier that you are VAT and CIS registered and the supply is under DRC and request an invoice without VAT charged on it.
What does the supplier need to do?
You need to confirm with the customer whether they are the end user? Keep a record of that response.
- Yes they are the end user – normal VAT rules apply.
- No they are not or you do not get confirmation that they are – domestic reverse charge rules apply.
Where the customer is not the end user and DRC applies, check their VAT registration number here. http://ec.europa.eu/taxation_customs/vies/ For new customers you will also need to check they are CIS registered.
VAT return
If you are supplying the service under DRC put the net value of the supply in box 6 only.
If you are buying the supply under DRC then you put the output tax in respect of that purchase in box 1, reclaim your input VAT in box 4 subject to normal rules and enter the net purchase in box 7.
We believe book-keeping software developers are currently working on their systems in anticipation of the 1 October 2019, so they will more than likely be ready by 1 October 2020.
Invoices under Domestic Reverse Charge
When you issue the invoice it needs to include the usual information. It also needs to clearly state that the customer is to account to HMRC for the reverse charge output tax on the VAT-exclusive price of items. The invoice should show the amount of VAT or the rate of VAT, but not actually charge it.
Is it just an accounting issue?
No it can have an impact on your cashflow. If you have been able to claim VAT back on invoices on a VAT return before you have actually paid them, you will be impacted. Similarly if you have charged VAT on invoices which a customer has paid before you submit your VAT return and pay the money over to HMRC then you will feel an impact. Also if you get it wrong you may have paid VAT to someone that you shouldn’t have and will still need to account for it to HMRC.
VAT schemes
Cash accounting and flat rate schemes do not apply to supplies under the DRC. So if you use these you need to review whether they are still beneficial or not.
If you will find yourself in a repayment situation as a result of these changes you may want to consider moving to monthly VAT returns to get your VAT repayment quicker.
Landlord and tenant arrangements
Where a landlord obtains a service for a tenant or vice versa the DRC rules will not apply as the landlord and tenant will be treated as a single end user.
Groups of companies
There are some similar rules for groups of companies e.g. where a development company may acquire services on behalf of another group company which is the end user they are both treated as the end user for DRC purposes.
Here is a link to government website where you can find more detail. https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services#services-excluded-from-the-domestic-reverse-charge
This blog is to raise your awareness and does not constitute advice. If you need to speak to an accountant for further advice, please get in touch with us. https://holdentaxconsulting.co.uk/contact/