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Domestic Reverse Charge: The final countdown for builders

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Neil Warren considers which builders will be affected by the new VAT domestic reverse charge (DRC) regime in the construction industry, which is due to come into effect on 1 March.

12th Jan 2021
Independent VAT Consultant
Columnist
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Never say never in the world of tax but I am confident that the new domestic reverse charge rules will definitely happen.

On 5 January a government spokesperson confirmed: “The government is committed to implementing the reverse charge on 1 March.” The previous start dates of 1 October 2019 and the 1 October in 2020 were rightly postponed by HMRC for various reasons. The countdown to 1 March 2021 has started.

The reverse charge rules often cause confusion. In brief the customer accounts for output tax in box 1 of their VAT return, based on a VAT exclusive invoice received from a supplier. If the supplier does not charge VAT in the first place, and is not therefore paid VAT, he cannot pocket the VAT money and disappear without paying it to HMRC.

That is the intended outcome of the DRC regime: to reduce VAT fraud in the construction industry.

In the case of builders supplying services, there are five key questions to ask. If the answer to the first four questions is ‘yes’ and ‘no’ to the final question, the reverse charge will apply and no VAT will be charged on sales invoices raised for the job in question, and the customer should account for VAT instead.

  1. Is the customer registered for the Construction Industry Scheme (CIS)?

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Replies (19)

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By bazzster
13th Jan 2021 10:10

This change was always going to cause chaos - it beggars belief that the government are still planning to bring it in when the country will be (most likely) still under lockdown. The companies that will have to implement these changes still doubtless have admin and finance teams working from home, so quite how they can be expected make such a huge change to their systems in these current difficult times I don't know.

For those companies (such as mine, an SME building services contractor), it's just more bureaucracy to add to the existing mountain of red tape. As with CIS before it, all this will do will be to add to the administrative burden for firms such as mine, who are well established and not likely to "disappear into the night with HMRC's money". Add to this the temporary cash-flow hit we're going to suffer at a time when working capital is already tight, and I can see this being a recipe for disaster for the industry.

Thanks (7)
Replying to bazzster:
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By AndrewV12
13th Jan 2021 10:57

But the Conservative are the party that removes un-necessary red tape and bureaucracy, ............... well they say so anyway.

Thanks (3)
By Nebs
13th Jan 2021 10:20

Did anyone run this scheme past the Office Of Tax Simplification?

Thanks (2)
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By AndrewV12
14th Jan 2021 10:32

Extract above

'That is the intended outcome of the DRC regime: to reduce VAT fraud in the construction industry.'

I could be wrong but I am not aware of mass Vat fraud in the construction industry, I would have thought they would be better targeting, missing trader fraud and carousal fraud in other sectors and industries.

Thanks (1)
Replying to AndrewV12:
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By FayeBK
14th Jan 2021 08:51

The fraud in the construction industry IS missing trader fraud.

Thanks (0)
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By North East Accountant
13th Jan 2021 12:39

This scheme is a crazy idea further complicating VAT which is already way too complicated.

Here's a simple idea.

If your customer is VAT registered don't charge VAT.... for all businesses. Put customer VAT number on all invoices. Checking facility online.

If your customer is not VAT registered charge VAT.

VAT Return 3 boxes;

Box 1= VAT charged to non VAT registered customers. This figure paid to HMRC.
Box 2= Nett sales to non VAT registered customers
Box 3= Gross sales to VAT registered customers (for information only)

Thanks (2)
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By robbie2016
13th Jan 2021 13:36

Absolutely beggars belief that this is still going ahead. SME companies will face a huge cashflow disadvantage, and the big main contractors will get a huge advantage.

If there is any VAT lost, it will clearly be from the small general builders working for homeowners, who simply 'forget' to charge VAT. But this system will not even solve that problem as they will be exempt as they work for the end user.

Total insanity and shows yet again how little understanding HMRC has of how the real world actually works.

Many small businesses will go bust as a result of this, mark my words.

Thanks (1)
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By robbie2016
13th Jan 2021 13:36

Absolutely beggars belief that this is still going ahead. SME companies will face a huge cashflow disadvantage, and the big main contractors will get a huge advantage.

If there is any VAT lost, it will clearly be from the small general builders working for homeowners, who simply 'forget' to charge VAT. But this system will not even solve that problem as they will be exempt as they work for the end user.

Total insanity and shows yet again how little understanding HMRC has of how the real world actually works.

Many small businesses will go bust as a result of this, mark my words.

Thanks (4)
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By Ian McTernan CTA
13th Jan 2021 13:59

Yet another needless complexity being introduced by the Treasury and HMRC at the worst possible time.
Just waiting for the same rubbish they used to excuse Section 24, 'only a few people will be affected'.
No need at all for this and will only make everyone's job harder.

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By Donald MacKenzie
13th Jan 2021 16:32

I'm sure there will be some sub-contractors who invoice VAT and do not account for it but they will be few in number and this response puts a burden on all to try to stop a small issue.
I have a client who had CIS deducted by a contractor who then did NOT report deduction to HMRC so my client's claim for offset against Corporation tax is still being argued. This type could also be billing VAT and not reporting it.

Thanks (1)
Replying to Donald MacKenzie:
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By AndrewV12
14th Jan 2021 10:30

That is always the fear when sub contractors have CIS deductions on their income, do the main contractors hand over the CIS to HMRC.

Its more worrying when the sub contractor does not receive monthly CIS deduction statements.

Thanks (0)
Replying to Donald MacKenzie:
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By AndrewV12
14th Jan 2021 10:30

That is always the fear when sub contractors have CIS deductions on their income, do the main contractors hand over the CIS to HMRC.

Its more worrying when the sub contractor does not receive monthly CIS deduction statements.

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By FayeBK
14th Jan 2021 08:55

I'm already so overwhelmed this year. So many VAT changes because of Brexit, client's needing much extra help because of lockdown (+Brexit), and now this.

Doubtful that they will delay it for a 3rd time, but my god they should.

Hey HMRC, how about when you want to bring in a change like this you fully educate people and bring in the systems to assist with it EARLY. They wouldn't have needed to delay it if they just implemented it properly the 1st time round in 2019.

Thanks (3)
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By davidfaram
14th Jan 2021 15:23

I agree that the VAT Domestic Reverse Charge will be difficult to administer in practice and also hard to explain its workings to builders and others in the Construction Industry Scheme.
Now that the UK has left the EU, I would suggest that VAT is simplified for subcontractors who supply labour only - the Chancellor should make these supplies zero-rated.
There will then be no VAT to charge on invoices to contractors or to end users and no need to apply the VAT Domestic Reverse Charge.
Job done!
Thanks are due to Neil Warren for his excellent article above.

Thanks (0)
Morph
By kevinringer
01st Feb 2021 13:19

I have several clients who supply construction services to the council, health authority etc. These are often 'end user'. So it's going to be messy.

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Morph
By kevinringer
01st Feb 2021 13:21

Currently it is the payer that has to identify whether the supply is CIS or not. Many VAT registered subcontractors are CIS gross so they're not interested whether the supply is CIS because they'll get paid in full. But this change means the subcontractor has to correctly identify whether the work is CIS to make sure the subcontractor invoices correctly. And if the contractor disagrees, what happens then?

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Morph
By kevinringer
01st Feb 2021 13:23

HMRC are introducing this because of VAT fraud. It only affects businesses that are both VAT registered and CIS registered. Every CIS payment is reported to HMRC monthly. So HMRC already knows exactly who has been paid, and how much. Surely HMRC being 'the most digitally advanced tax authority in the world' can join up their VAT and CIS databases and identify who isn't handing over VAT. I would have thought that would be much for effective than this complex new regime.

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Morph
By kevinringer
01st Feb 2021 13:26

Who do we contact with we have a DRC query? I suspect that if I phone HMRC VAT Helpline they'll tell me it's CIS, and if I phone CIS they'll tell me it's VAT.

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Morph
By kevinringer
01st Feb 2021 13:27

I've contacted some of my building clients and when I mention 'domestic reverse charge' they say 'doesn't apply do us because we only do commercial work, not domestic'. HMRC, why did you choose such as misleading name for the new regime?

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