VAT Domestic Reverse Charge for Construction Industry Supplies
Although the VAT Domestic Reverse Charge (DRC) for construction industry supplies has been in place since March 2021 the impacts of the scheme are still being uncovered.
What is the Domestic Reverse Charge?
The Domestic Reverse Charge is designed to prevent avoidance of VAT by suppliers who collect VAT on their invoices but then fail to pay it over to HMRC.
The DRC changes responsibility for VAT to the recipient of the supply, typically the main contractor, who then applies VAT to their contract payment, but also reclaims this VAT as Input Tax, meaning that no VAT changes hands between parties in the supply chain.
Which Services are Within the Domestic Reverse Charge?
The rules only affect supplies to which the Revenue’s Construction Industry Scheme rules apply and where VAT is charged, so the construction of new houses (a zero rated supply) does not fall within the rules, but commercial property and renovation projects will potentially be affected.
There is also an exception for supplies to the “end user”, which includes landlords contracting for work on their own properties and also developers who do not make onward CIS supplies but only selling completed properties.
A significant impact that has quickly become clear is that for some businesses there is a cashflow issue, particularly where it has been previous practice to use the VAT collected on contracts to support overheads and project costs.
Subcontractors within the DRC no longer receive payment of VAT in addition to the contract price and this can require careful financial management to ensure sufficient cash is available to fund ongoing contract costs.
One consequence of the DRC is that little VAT is payable by subcontractors to HMRC, meaning VAT Returns change from owing amounts to HMRC to repayment claims. One easy way to improve cashflow can therefore be to adopt monthly VAT Returns, as this accelerates the VAT repayments from HMRC from every three months to each month.
There are sometimes difficulties agreeing the treatment of particular supplies and whether they fall within the terms of the DRC, so clear communication of the expected VAT treatment early in contract negotiations is important to avoid delays when invoicing.
Another consequence of the scheme can be increased due diligence is required when buying or selling an affected business, particularly if there is any uncertainty over compliance with the rules of the Domestic Reverse Charge. This may also impact efforts to obtain additional finance as lenders may require assurances and additional cashflow projections as a result of involvement with the Domestic Reverse Charge.
If you have any queries regarding the Domestic Reverse Charge for construction industry supplies please contact Alan Rolfe on 023 8046 1235.