Property development and building consulting

Domestic Reverse Charge VAT: And How It Affects You

After delays related to both Brexit and the Coronavirus pandemic, the new VAT legislation — Domestic Reverse Charge (DRC) — is finally here.

Coming into effect in March 2021, Domestic Reverse Charge VAT was introduced by HMRC to apply to the construction industry. It is a hot topic in the sector, and getting to grips with it can seem overwhelming.

Here, you will find a simple overview of Domestic Reverse Charge VAT — what it is, why it has been introduced, and most importantly, how it will affect you.

All those working in the construction industry should be aware of this change to VAT regulations, and how it could affect their business.

What Is Domestic Reverse Charge VAT?

There are several complexities surrounding Domestic Reverse Charge VAT that relate to your individual circumstances, but in its simplest terms, DRC (Domestic Reverse Charge) is a new way of accounting for VAT.

All VAT-registered construction companies in the UK will be subject to these new changes. Essentially, the legislation transfers liability to the customer (contractor) as opposed to the supplier (subcontractor).

Why Has Domestic Reverse Charge VAT Been Introduced?

One of the key reasons that this new VAT legislation has been introduced is to try and reduce fraud. The HMRC and other services have identified sophisticated fraud and criminal activity within the UK VAT system, and DRC will make it more difficult for this deception to happen in future.

‘Missing trader’ fraud in particular — in which companies do not pay VAT to HMRC despite receiving high net amounts of VAT from their clients and customers — is expected to be greatly reduced.

How Will It Affect My Business?

Depending on whether you are a contractor or a subcontractor, DRC will affect and impact your business differently.

For example, if you are a VAT-registered customer (contractor) you must account for both the output and input tax on the invoices that you receive from your VAT-registered subcontractors.

However, if you are a supplier (i.e. a VAT-registered subcontractor) who is providing building and construction services to a CIS and VAT-registered customer (i.e. a contractor) then you will no longer need to account for the VAT. Your invoice should instead state that the VAT reverse charge is applied and that your customer is responsible for the VAT (using the procedure of reverse charge).

How Can I Prepare My Business For These Changes?

These adjustments are new for everyone, so it will take some preparation and understanding to make a smooth transition. As well as reading up on the changes and seeking expert advice if necessary, there are three key ways that you can prepare your business to navigate the challenges of DRC and continue to thrive.

1. Communicate Effectively

It is essential to communicate the changes in procedure to your staff, contractors, and customers. Any team members who are responsible for handling VAT accounting must be aware of the reverse charge and how it will work in basic terms. Being compliant will help to ensure that there are no costly mistakes or penalties in the future.

If you are a contractor, it is also a wise idea to proactively contact your registered subcontractors as early as possible, as the changes come into play on 1st March 2021. Make sure they are aware of the new regulations, so that they do not continue to invoice you for VAT once the date has passed.

Similarly, if you are a subcontractor, contacting your clients and contractor customers to make them aware you will now be applying domestic reverse charge to your invoices, is wise and courteous.

2. Update Your Software

A high proportion of businesses use a variety of apps and software to manage their budgets, accounts, and invoices. Ensure that yours is up to date and able to handle the new VAT domestic reverse charge.

If you do not currently use any software to assist with your business accounting, these changes could be a great time to start. Many software and online accounting options can manage these updates automatically and make your invoicing and accounting processes much smoother as a result.

3. Carefully Consider Your Cashflow

The changes will impact the cashflow of businesses in a variety of ways. Contractors may have a short-term cashflow benefit as they will no longer be paying their subcontractor the VAT amount (though they will of course need to account for VAT as output and input tax along with the remainder of their VAT accounting).

However, subcontractors may have their cashflow somewhat negatively impacted initially, as they will no longer be receiving the VAT payment. But with preparation, expert help, and the appropriate software, you and your business will rise to the challenge!

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