VAT: Domestic reverse charge in the construction industry
8th Aug 2019
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The Domestic Reverse Charge (DRC) in the construction industry starts 1 October 2019.
The regulation intends to cut down on “missing trader” fraud, where companies receiving high net amounts of VAT from their customers have no intention of ever paying over to HMRC. DRC will only apply to individuals or businesses registered for VAT in the UK.
Xero does not currently support DRC but will do very soon. Our development team is currently building a solution to help you meet your DRC obligations by the start date. The solution will also support other products and services impacted by the DRC such as mobile phones, computer chips and emissions allowances.
Please see below to learn more about how the regulation works and who will be affected in the construction industry.
How did the DRC come about?
In response to “missing trader” fraud, the government announced its intention to introduce a Domestic Reverse Charge to the construction industry during the Autumn Budget 2017.
Several consultations were carried out as well as discussions with stakeholders – the regulation is a result of these actions.
Which supplies will be affected?
DRC affects supplies at standard or reduced rates – where payments are reported through the Construction Industry Scheme (CIS).
Supplies between subcontractors and contractors will also be subject to the Reverse Charge unless they are connected to a contractor that’s an end user.
An end user is someone who uses the construction services for themselves rather than selling these as part of their construction business.
How does the Domestic Reverse Charge work?
The Reverse Charge means the customer receiving the specified service has to pay the VAT to HMRC instead of the supplier. In turn the customer can recover the VAT, subject to the normal rules for VAT recovery.
How many businesses will be affected?
The Domestic Reverse Charge is estimated to affect up to 150,000 businesses in the construction and building sector.
What if businesses experience difficulties implementing the Domestic Reverse Charge?
HMRC will apply a light touch in dealing with related errors that occur in the first six months after the 1 October start date, where businesses are trying to comply with the new legislation.