We’re pleased to announce that the Domestic Reverse Charge (DRC) is now live in Xero. The new feature will help you comply with your DRC obligations.
DRC 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 only applies to individuals or businesses registered for VAT in the UK.
Products and services affected by DRC
The Domestic Reverse Charge for building and construction services was due to come into effect on 1 October 2019 however industry representatives raised concerns about the readiness of some businesses. So to give businesses additional time to prepare HMRC delayed the regulation until 1 October 2020.
For the time being our new DRC feature can be used for the following products and services affected by the regulation:
Xero’s new feature helps you comply with the Domestic Reverse Charge, whilst reducing errors and saving precious time.
Xero now includes:
Four new taxes to help you comply with DRC: 20% VAT on Income, 5% on VAT Income, 20% VAT Expenses, 5% VAT on Expenses
Automatic DRC calculations in your invoices, bills and credit notes
Automatic DRC updates on your Making Tax Digital return
How to add DRC tax rates in Xero
It’s easy to add the Domestic Reverse Charge tax rates in Xero – just follow the simple steps below and you’re all set.
In the Accounting menu, select Advanced
Click Tax rates
Click Add Domestic Reverse Charge Tax Rates
Click Add Domestic Reverse Charge Tax Rates to confirm
See it in action
Impact on the VAT return for suppliers
Under the Domestic Reverse Charge, suppliers that provide a specified service don’t account for the VAT due on the supply.
When completing the VAT return, Xero:
Enters the total value of the sales subject to DRC (including credit notes) in Box 6 of the return as normal
Doesn’t record any sales tax in Box 1, as this is accounted for by the contractor
Impact on the VAT return for customers
Customers receiving a specified service account for the VAT on sales, by selecting a DRC tax rate on the invoice. The VAT on sales gets deducted as an input in the VAT return, which means no net tax is payable to HMRC.
When completing the VAT return, Xero automatically:
Enters the tax on purchases subject to DRC, including any reductions due to credit notes, in Box 1 of the return
Reclaims the input tax on the DRC purchases in Box 4, subject to the normal rules This includes any reductions due to credit notes
Enters the net value of the purchases under DRC (including credit notes) in Box 7