VAT Domestic Reverse Charge

As you might have received letters from HMRC regarding the application of VAT Domestic Reverse Charge from March 2021, we would like to clarify few points to make sure you have understood the working of DRC.
DRC applies to you if you are:

• in the construction industry providing building and construction services, please refer to the HMRC list for detailed guidance on what specific services are covered. (HMRC List Here)
• you are registered for VAT and CIS
• you are receiving or selling the services that are within the scope of CIS and that are VATable
• the customer is NOT AN END USER, so DRC applies where there is the business to business (B2B) transaction
• If there is a reverse charge element in a supply of service, then the whole supply will be subject to the domestic reverse charge. i.e Materials without CIS & Labour With CIS- Becomes a whole invoice reverse charge for VAT Purposes. The legislation is designed so that if there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge.

VAT Domestic Reverse Charge

Using Xero or Quickbooks For

If you are using Xero or QuickBooks, the DRC vat code should be updated in the system latest by 1 March and you just need to put the net amount of billing and select the code. The rest of the thing will be taken care of by the system itself

• When you are receiving services (B2B, CIS, VAT) from the supplier, the supplier will issue you with a DRC invoice and the VAT due on the supplier bill should be paid to HMRC directly via VAT return and MUST NOT BE PAID TO SUPPLIER.

End Users and Intermediary suppliers

VAT Domestic Reverse Charge does not apply to:

‘End Users’ i.e. a VAT registered customer who is not intending to make further on-going supplies of construction. The services are supplied to an end-user, such as the property owner, or directly to the main contractor that sells or lets a newly completed building for Example Berkley Homes constructed 1000 Homes and sells out to final customers

‘Intermediary suppliers’ who are connected e.g. a landlord and his tenant or two companies in the same group.
What is going to change exactly?

In the above cases where DRC is applicable, if you are providing services to a customer (B2B, VAT, CIS), you will have to issue a DRC invoice which mentions that the ‘Domestic reverse charge applies and customer needs to account for the VAT due to HMRC’. You should also mention the rate/ amount of the DRC VAT but MUST NOT BE CHARGED TO CUSTOMER.

VAT Domestic Reverse Charge

Excluded services-DRC is not applicable to the following services

• Drilling for, or extracting, oil or natural gas.
• Extracting minerals (using underground or surface working) and tunneling, boring, or construction of underground works, for this purpose.
• Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site.
• Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site.
• The professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants. This is Very Common in Construction services the Accountant need to look into it and advise accordingly.
• Making, installing and repairing artworks such as sculptures, murals and other items that are purely artistic.
  Signwriting and erecting, installing and repairing signboards and advertisements.
• Installing seating, blinds and shutters.
• Installing security systems, including burglar alarms, closed-circuit television and public address system

VAT Domestic Reverse Charge-Treatment

Treatment of existing contracts to be ready for 1 March 2021

The VAT treatment is determined for payments due on any supplies entered into your accounting system before 1 March 2021, but paid on or after 1 March 2021.

Date entered in customer’s accounting system Date payment made VAT Treatment

Before 1 March 2021 On or before 31 May 2021: Normal VAT rules

Before 1 March 2021 On or after 1 June 2021: Domestic reverse charge

On or after 1 March 2021 On or after 1 March 2021: Domestic reverse charge

For details, please visit HMRC to get in touch with our construction (CIS) services. You can also browse through our blogs for VAT-related topics like MTD For VAT.