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Last updated: 1 Mar 2021
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VAT Domestic Reverse Charge for Construction services in place from 1 March 2021

After two postponements, the Domestic Reverse Charge (DRC) for Construction Services, a major change to the way VAT is collected in the building industry, has finally come into play. In this article, we’ve shared what the DRC is, who it affects and the key actions to take.
What services does it apply to?

From 1 March 2021, the DRC requires contractors and sub-contractors to change their VAT accounting and means the customer receiving affected services will be required to pay the VAT due to HMRC, instead of paying the supplier.

  

What services does it apply to? 

The DRC applies only to services supplied to customers who are registered for the CIS and only to:

  • construction services and related goods, which are reportable for the Construction Industry Scheme (CIS);
  • services that are liable to standard rate or reduced rate VAT;
  • services supplied to a VAT registered (or registrable) entity/person acting in a business capacity.

Due to the way it applies, the DRC may require suppliers to charge VAT on some contracts and not others.

About the author

Linda Skilbeck

+44 (0)20 8037 3114
skilbeckl@buzzacott.co.uk
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From 1 March 2021, the DRC requires contractors and sub-contractors to change their VAT accounting and means the customer receiving affected services will be required to pay the VAT due to HMRC, instead of paying the supplier.

  

What services does it apply to? 

The DRC applies only to services supplied to customers who are registered for the CIS and only to:

  • construction services and related goods, which are reportable for the Construction Industry Scheme (CIS);
  • services that are liable to standard rate or reduced rate VAT;
  • services supplied to a VAT registered (or registrable) entity/person acting in a business capacity.

Due to the way it applies, the DRC may require suppliers to charge VAT on some contracts and not others.

Exclusions – when does the DRC not apply?

Exclusions – when does the DRC not apply?

If the reverse charge services are less than 5% of the total value of the contract, this can be disregarded (known as the ‘5% disregard’) and normal VAT rules will apply. Normal VAT rules also continue to apply for the provision of construction staff by employment businesses, even though such supplies fall under the CIS regime mentioned above.

End users and intermediary suppliers

If services and related goods are supplied to business customers who are ‘end users’ and who have notified that status to the supplier, DRC doesn’t apply and these are subject to the normal VAT accounting rules. An ‘end user’ is an entity that uses construction services for any purpose other than making further supplies of construction services. Generally, these are landowners and occupiers of property. For example, a charity commissioning building work for its own property. 

There’s also an exception if construction services are supplied to a person who is connected to an end user – an ‘intermediary supplier’ who has notified that status to the contractor. This includes in-house design and build companies, and connections through a landlord and tenant relationship. Therefore, this exception limits the impact of DRC on housing associations and charities with rental portfolios. 

Suppliers can consequently assume that if they don’t receive a notification from a customer who meets the other conditions, the reverse charge will apply. 

What should you do?

What should you do?

As a customer of building or construction services liable to the DRC, you should ensure that your accounting systems are able to deal with reverse charge accounting as well as the usual VAT rules. Your accounts payable staff will need to be able to recognise how to process invoices from contractors or subcontractors in order to pay the correct VAT.

If you’re a sub-contractor, you will be affected by the loss of the use of VAT for cashflow purposes. 

DRC supplies are excluded from Flat Rate Scheme (FRS) calculations, so if you’re a small construction business, you may find that it is better to leave the FRS if you expect to have a lot of DRC work. Otherwise, you may lose out by not being able to deduct VAT on costs.

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Speak to an expert

For more information on the Domestic Reverse Charge, or advice tailored to your specific circumstances, please fill out the form below and one of our VAT experts will be in touch to help.

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