Domestic Reverse Charge for Construction Industry
The Domestic Reverse Charge (DRC) which has been delayed twice, because of Brexit and then Covid-19, will come into effect on 1st March 2021. HMRC is hoping DRC will make it harder for fraudulent sub-contractors to charge VAT to their customers and then not declare in the returns. Sadly, that has been a regular occurrence in the sector and accounts for a huge loss in tax revenue to HMRC. The DRC system has already been introduced in some other sectors (mobile phones, utilities) and has so far worked well. It is basically an extension of the CIS.
What does it do?
When the DRC applies, it shifts the claim and recovery of VAT to the end recipient of goods and services. This applies to full and reduced VAT rates, but not to 0%.
What Does the Domestic Reverse Charge Apply to?
It will apply to most supplies from business to business. HMRC have issued specific guidance notes, which you can find here.
Who Does the Domestic Reverse Charge Apply to?
HMRC says that it will apply to sub-contractors who answer yes to all the following questions:
- Are any of the supplies you are making within the scope of the CIS?
- Is the supply standard or reduced-related?
- Is your customer VAT registered?
- Will you payment be reported under CIS?
- Are you sure the customer is not an end user?
We’ve made a simple flowchart that illustrates this clearly…..
Download Our Easy Guide to DRC or VAT?
What can you do to prepare?
Well conveniently, many of the practices we regularly encourage our clients to do will help you prepare. With the addition of a few more steps.
Systems and Training: Make sure the relevant staff in your company are aware of the changes and how they will work in practice. Offer training where required and devise systems for identifying which VAT system a project falls under and in the case of DRC, who is the end user. If you have your accounts done externally your accountant should be aware of this and what changes you need to make, but it is worth checking.
Cashflow: The change in process will see you bringing in less cash in the short term in the shape of the VAT you would have charged on your goods or services. It can be easy to depend on that as a buffer until it is paid out to HMRC. Effective cashflow forecasting will help you make the transition to the new system more easily and with less risk.
Cloud Accounting: You must ensure that your accounting systems and software can cope with the changes. There aren’t many old dinosaurs still using spreadsheets and gathering paper receipts, but they still exist. Easy to use cloud accounting software will help you keep track of your sales, purchases, invoices, and receipts with a nuance that can more easily allow for these changes. They are easy to use and will give the added advantage of meaning you know exactly where your finances are at any moment.
DRC and Xero
As you would expect, Xero have been working hard to incorporate a new feature to make DRC easier to manage and calculate for users. This will include calculating your DRC to reduce errors and providing updates. You can find out more about that here.
Please note that you need to activate DRC in Xero. There are instructions in the above link. If you’re not comfortable making this change, we can help.
As ever, if you have any questions about DRC or how it will affect you, or for help getting properly set up, just give us a call (020 8819 8762). We’re always happy to chat. Or email us at firstname.lastname@example.org
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