Despite the name, the DRC is nothing to do with private households. It is “domestic” only in the sense that it applies to transactions wholly within the UK. This new DRC is intended to counter “missing trader fraud”—that is, where a supplier has no intention of ever paying over to HMRC, but the customer reclaims VAT as input tax. Under DRC, suppliers will no longer be required to account for VAT.
Instead the customer will account for VAT under a “reverse charge” arrangement. That is, the customer will account for VAT as if he had himself made the supply (to himself) and will also, if and to the extent appropriate, recover the same VAT as input tax. The DRC will only apply to services which are reportable for Construction Industry Scheme (CIS) purposes and where the services are supplied to a VAT registered entity.
One of the principles of the DRC is that supplies to customers who are ‘end users’ are subject to the normal VAT accounting rules and the DRC does not apply. An end user in this context is an entity which uses construction services for any purpose other than making further supplies of construction services. Generally, these will be landowners and occupiers of property, for example, any charity commissioning building work for its own property.
The DRC rules also include an exception for supplies of construction services to a person who is connected to an end user. This includes for example in-house design and build companies, and connections through a landlord and tenant relationship, which will limit the impact of DRC on housing associations and charities with rental portfolios.
The challenge for suppliers will be to identify whether supplies of construction services are being made to an end user or not. HMRC are drafting guidance which is expected to be published soon. The guidance suggests that HRMC will expect end users to confirm their status to suppliers. Most VAT registered charities buying construction services will be end users and can expect any contractors to ask them to confirm this after 1 October 2019.
Supplies of staff
HMRC’s latest position is that the provision of construction staff by employment businesses will not be subject to the DRC even though such supplies fall under the CIS regime. Normal VAT rules will therefore continue to apply to such supplies.
DRC has wide-reaching implications for those supplying and receiving construction services. VAT registered charities which receive construction and building services will need to be ready to confirm their end user status to their suppliers.
HMRC guidance on the Reverse Charge can be found here.