If you are involved in construction services then you need to know about the UK VAT Domestic Reverse Charge (DRC)! 🏗️
What is the VAT Domestic Reverse Charge?
The DRC is a change in how VAT is collected in the building and construction industry, which came into effect from 1 March 2021. It was introduced to combat VAT fraud in the construction industry and means that the responsibility for reporting a VAT transaction shifts from the seller to the buyer. Essentially, the customer receiving the service must account for the VAT instead of the supplier.
Who Needs to Use the Domestic Reverse Charge?
Is your business registered for VAT in the UK and involved in construction services? If so, you’ll likely need to use the DRC. The charge applies to services that fall within the Construction Industry Scheme (CIS), covering tasks like:
- Constructing, altering, repairing, or extending buildings and structures 🏢
- Installing heating, lighting, air-conditioning, and other systems 🛠️
- Internal cleaning of buildings during construction 🧽
- Painting and decorating buildings 🎨
What About Materials and Labour?
Unsure about how materials and labour are treated? When goods and building materials are supplied with construction services, the DRC applies to both. Even if labour and materials are invoiced separately but under one contract, the DRC still applies to both!
CIS vs. DRC: What’s the Difference?
Do you know the difference between CIS and DRC? Under CIS, deductions are made only on labour, not materials. However, the DRC applies to the whole service, including both labour and materials.
CIS (Construction Industry Scheme) is a set of rules established by HM Revenue and Customs (HMRC) for contractors and subcontractors working within the construction industry in the UK. The main aim of CIS is to combat tax evasion in the construction sector by ensuring that contractors deduct money from a subcontractor’s payments and pass it directly to HMRC.
When Not to Use the DRC
Are there instances when the DRC doesn’t apply? Yes!
The DRC should not be used for:
- Drilling for or extracting oil or natural gas 🌍
- Extracting minerals or tunnelling for this purpose ⛏️
- Professional services of architects or surveyors 🏛️
- Manufacturing building components off-site 🏭
Preparing for the DRC
Is your business ready for the DRC? Make sure your accounting systems can handle the reverse charge, and train your staff on how it works. It’s also crucial to understand the impact on your cash flow.
For detailed guidance consult HMRC’s official guidance.
Or contact the IN team if you need more help:
Contact Details for IN Accountancy | Stockport, Cheshire, SK7 (in-accountancy.co.uk)
