Domestic Reverse Charge for Construction Industry Delayed
If you are in the construction industry you may have been dreading the introduction of the VAT Domestic Reverse Charge this year. On top of the fears over Brexit and now, of course, the massive hit the economy has taken from the coronavirus crisis, the introduction of another layer of admin was almost too much to bear. Thankfully, the government appears to be of the same mind, and the charge has been postponed (again) until March 2021.
However, we would not advise you to just forget about it until you’ve taken the Christmas tree down. Early planning and preparation will help you navigate the changes more effectively. So, what is it exactly and who will it affect?
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. 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%. HMRC is hoping it 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.
What Does the Domestic Reverse Charge Apply to?
HMRC have issued guidance notes which you can find here.
Who Does the Domestic Reverse Charge Apply to?
Again, HMRC has obligingly outlined who the VAT reverse charge applies to (see Annexe 1 in the guidance). It states 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?
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.
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: 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.
Systems and Training: Make sure the key stakeholders 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.
As ever, if you have any questions about DRC or how it will affect you but give us a call (020 8819 8762). We’re always happy to chat. Or email us at firstname.lastname@example.org