Domestic Reverse Charge for the Construction Industry

The new Domestic Reverse Charge (DRC) rules for the construction industry, introduced from 1 March 2021, apply to Construction Industry Scheme (CIS) and VAT registered contractors and subcontractors. It has been referred to as an extension to the CIS.

When a VAT registered subcontractor sells construction services reportable under CIS to a contractor, the subcontractor will no longer charge VAT. Instead it will be the contractor’s responsibility to declare both the output VAT and input VAT on their VAT return.

This reverse charge does not apply to end users where they tell their supplier or building contractor in writing that they are an end user. End users are consumers and final customers which include businesses that are VAT and CIS registered but do not make onward supplies of the building and construction services supplied to them.

The reverse charge does not apply to intermediary suppliers either which are VAT and CIS registered businesses that are connected or linked to end users. If intermediary suppliers buy construction services and re-supply them to a connected or linked end user, without making material alterations to the supplies, they are all treated as if they are end users.

Many subcontractors may now find that the reverse charge means their business will now make net repayment claims to HMRC, as they no longer receive VAT on their sales. If so it may be advisable to move to monthly VAT returns to improve cash flow.

Most accounting software providers have made provision for this new reverse charge adjustment in the UK VAT return, therefore the accounting for this change is likely to be relatively straight forward. What appears to be causing more of an issue is the identification of instances where the DRC will apply and the effect on supply chains and lines of communication between contractors and subcontractors, who are finding these new rules confusing.

HMRC has therefore specifically noted that “it is understood that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith. Any errors should be corrected as soon as possible, as the longer under declared or overcharged sums remain outstanding the more difficult it may be to correct or recover them. HMRC officers may assess for errors during the light touch period, but penalties will only be considered if you are deliberately taking advantage of the measure by not accounting for it correctly.”