Accountants Guide on Domestic reverse charge in 2021

Domestic reverse charge Guide

Earlier this year, the government introduced a new legislation bill that sought to tackle and deal with fraudulent building and construction activity. This bill, known as the Domestic Reverse Charge Bill was officially put into place earlier this year on March 1st, of 2021.

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What is the DRC and what does it do?

Known simply as the DRC, the Domestic Reverse Charge is a new piece of legislation that states certain construction businesses may no longer be required to charge the supply of materials and services to VAT. In order to qualify, the materials must be required to be reported under the CIS. Those that aren’t will still have to account for their own VAT and what they would normally pay the supplier to the HMRC.

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The reason for this legislation is due to the increase in fraud opportunities observed for micro-businesses. Smaller and sub-contractors, due to their micro-status, have been able to avoid paying their collected VAT.

VAT (also known as Value-Added Tax) is a consumption tax that is put onto products as the value of the product increases throughout its production and ultimate point of sale. Users pay an amount of VAT that is on the product’s cost, less the material costs that may have already been taxed individually.

The CIS (also known as Construction Industry Scheme) is used to collect VAT as well as Income Tax from those involved in the construction world. This includes subcontractors and other self-employed or independent builders as well. This is done in place of them paying Income Tax or making National Insurance contributions. This is done by way of the HMRC using the CIS to collect taxes from said contractors.

In the construction industry, in particular, the DRC for VAT will specifically apply for any construction-based services that are supplied at standard rates or reduced rates. The services must also need to be reported under CIS and relates to both materials used as well as labour.

If a construction or business does not make onward supplies regarding their services, reverse charges will not apply. Because of this development, it is important that all customers that are currently registered for VAT and CIS ensure that their suppliers do not apply a reverse charge for services supplied to them.

As there will often be times a person does and does not pay the VAT reverse charge, it is important that everyone involved in the construction based industry have a full understanding of the new system. This may likely require working with an experienced accountant to ensure everything is properly in order.

In the below section, we have broken down and listed many possible and potential issues that may arise depending on the company’s business type. It is important to keep in mind, however, that there are no absolute rules, and that there will certainly be a fair bit of “grey area” involved. Reviewing this with an experienced accountant will ensure you and your company do not run into any issues later on in the construction process.

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