Revisiting the VAT Domestic Reverse Charge

The VAT Domestic Reverse Charge (DRC) is a tax mechanism introduced by the UK Government for the Construction Industry in 2019. The purpose of the legislation is to prevent fraud – according the ONS (office for national statistics) across the whole of the economy 4% of VAT that is collected by businesses is never received by HMRC. Unfortunately, that figure for the construction industry was 14%! Given that figure it was inevitable that Government had to act – but even so, the introduction of the scheme caused widespread confusion across the industry. Two years on we thought it would be a good time to revisit this complex system that requires an understanding of both the construction industry and how it operates, as well as a knowledge of VAT reporting! In this article we provide you with a quick refresh on what it is, how it works, and its benefits.

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How does it work in the Construction Industry? The VAT Reverse Charge applies when the recipient of the services is registered for VAT and the payment for the services is reported through the CIS. If the recipient is not VAT-registered or the payment is not reported through the CIS, the Reverse Charge does not apply, and the supplier must charge VAT as usual. The DRC is designed to combat missing trader fraud, whereby the recipient of goods or services is responsible for accounting for VAT rather than the supplier. However, much of the confusion arises when there is a supply chain of services, which is typical of our industry! This means that the recipient of the construction service must declare the VAT due on their VAT return and, only if they sit at the top of the CIS supplier chain supplying the end client, collect and pay it directly to HMRC. The supplier does not charge VAT on their invoice and must state that the Reverse Charge applies. The Reverse Charge also applies to goods that are supplied with the construction services, such as building materials. However, it only applies if the value of the goods is more than 5% of the total value of the supply.

What are the benefits of the VAT Reverse Charge? Well in theory the VAT Reverse Charge provides at least one benefits to the construction industry by:

1. Reducing the risk of fraud – By shifting the responsibility for accounting for VAT to the recipient, the Reverse Charge makes it more difficult for businesses to commit VAT fraud. If you are in that supply chain HMRC could have previously denied suppliers the input VAT, and thus penalised the supplier for the missing money – claiming they knew, or if they had used the correct due diligence should have known that fraud was likely to take place.

2. Encouraging compliance – The Reverse Charge provides an incentive for businesses to register for VAT and report payments through the CIS, as failure to do so will result in the supplier having to charge VAT as usual.

Conclusion The VAT Reverse Charge is a complex system that applies to all construction businesses that are VAT and CIS registered in a supply chain, until supplying the end user – whereby VAT is charged to the client and paid to HMRC as normal.

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Nick Pilgrim

M.D. | CIS Payroll Expert
01245 493832

Nick loves nothing more than chewing the fat over CIS payroll queries – actually that’s not strictly true; he likes playing golf and driving round Europe, but pick up the phone to him anyway!

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