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UK construction firms – are you ready for VAT domestic reverse charge?

There are just a few days remaining before the new VAT domestic reverse charge (DRC) is applied to building and construction services in the UK.

From 1st March, businesses supplying or receiving certain services within this sector (including both suppliers and customers) will need to comply with the new regulations.

What is it?

The arrival of the VAT Domestic Reverse Charge for Building and Construction Services (to give it its full title) marks a change in the way certain businesses in the UK must handle VAT relating to particular types of construction services.

It applies only to transactions that are reported under the Construction Industry Scheme (CIS) and are completed between contractors and sub-contractors that are both VAT-registered in the UK.

Essentially, it means businesses that supply construction services will no longer be required to account for the VAT and the customer will instead be responsible for paying the relevant sum to HMRC.

What VAT rates will it apply to?

All supplies that are charged at either standard rate or reduced rate will be applicable for DRC. It does not apply to zero-rated supplies.

Who will it apply to?

In short, the majority of UK VAT-registered construction businesses.

VAT-registered companies that make or receive standard or reduced rate construction services that must usually be reported under the CIS will now be required to adhere to the DRC.

However, if a business supplies construction materials (but not services) it will not be affected by the new rules and normal VAT terms continue to apply. Similarly, firms that only produce zero-rated supplies are not required to follow DRC.

In instances of mixed supplies (i.e. those transactions that contain some elements which the domestic reverse charge should be applied and others for which it should not), HMRC has ruled that DRC should apply to the entire supply (subject to a 5% disregard). This means that the customer will not be required to pay VAT to the supplier as they currently do.

What about businesses that are not VAT-registered?

Any business that has not registered for UK VAT must inform their supplier prior to receiving supplies. They will subsequently be charged VAT under the current rules.

What services does the DRC apply to?

HMRC has released a list of construction services that will be subject to the new DRC rules. These include:

  • Construction, alteration, repair, extension, demolition or dismantling of buildings.
  • Construction, alteration, repair, extension or demolition of any works forming part of the land, such as walls, roadworks, power lines, airport runways and railways.
  • Internal cleaning of buildings or structure.
  • Painting or decorating of any building or structure.
  • Installation of heating, lighting, air conditioning, power supply, drainage and other functions within any building or structure.

What happens to current construction projects?

Construction work that spans the implementation of the DRC will understandably cause complications. Businesses should continue to follow the normal tax points within current projects, so if an invoice has been issued prior to 1st March it will not be subject to the DRC rules.

What does it mean for contractors and sub-contractors?

For contractors, the new regulations mean they will need to ensure they receive reverse charge VAT invoices and correctly account for them. Sub-contractors are not likely to notice any change, as they will be passing on VAT charges they would have had to account for even under the old rules.

Does the DRC affect Making Tax Digital requirements?

No. Making Tax Digital only affects how companies must submit VAT returns and record their accounting. It has no impact on the DRC, other than meaning businesses will need to record their reverse charges digitally.

What do you need to do?

If you supply or receive construction services covered under the CIS after 1st March you will have to meet the regulations set out by the DRC. This is likely to have a significant impact on your accounting, invoicing and cashflow.

The most important step is to ensure your IT systems and any financial software are prepared for the new requirements. These can include your invoicing and tax solutions.

It is also wise to contact any regular suppliers and sub-contractors to make any adjustments required to your processes to ensure compliance.

At Innovate Tax, we work with our customers to ensure their automated tax determination and reporting solution is always maintained and updated to comply with the latest VAT rates and rules. Get in touch with our team today to find out how we can help your business.