Questions build around DRC rules for construction
Hilary Bevan looks at the common questions and pitfalls that have arisen since the new VAT domestic reverse charge (DRC) rules came into effect for the construction industry.
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Hilary Bevan has over 20 years of experience working in accountancy and tax. She is a qualified chartered certified accountant as well as a chartered tax adviser and an associate of the Institute of Indirect Taxation.
In 2018 Hilary set up her own independent consultancy firm, providing specialist VAT advice to firms of accountants and...
Replies (18)
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The easiest thing would be to have no vat transactions between registered business. Don't forget VAT is not a tax on business (unless you turnover less than £85K.)
"Don't forget VAT is not a tax on business (unless you turnover less than £85K.)"
If i have 84 sales and 10k profit year one
and 86k sales and nil profit year 2 due to 10k approx vat being payable with everything else being as it was.
Its hard probably possibly even "stupid" to argue that this business has not been taxed and taxed very heavily despite being over the vat threshold now. Facts are this business is paying out 10k it wouldnt have done and hmrc get 10k it would not have done had the business not had 2k extra sales. Ok the reasons is they had teh prior "free lunch"which has ben removed but i wouldnt want to say to any suhgc client they are not being "taxed" heavily when the fact is that they are (compared to previously)
Your scenario is called "the cliff hanger". Many at that stage choose to have a day off or whatever to keep their turnover below the threshold.
My view is, and always has been, that all business should be vat registered with no VAT changing hands between registered business so only Joe Public pays (which is what VAT was all about). However HMRC would lose a lot of dosh.
The problem we are having is that some of our customers (who are major facilities managment companies) are refusing to pay any invoice unless the DRV is applied, even though in the majority of cases we are providing work that does not come under the scope of CIS eg servicing
The trick here is to slap em in the face with facts - if company is emailed concrete guidance cis does not apply then they will back down or simply provide you with no work thats your choice unfortunately - so practicably speaking sometimes sucking it up is easier. I have seen no company to big to take down when they are wrong as someone has responsibility to not get it wrong if you know you are right.
In their deference the line is often fine ref servicing and cis that practicably speaking it may be easier to go with the flow - i feel sorry for the poor peeps paid little procesing these transactions needing top level + knowledge of teh rules- get formal agrement work may have cis and non cis elements and both parties agree this being case its all DRC.
Note similar tends to happy when electricians and plumbers are paid - if you dig inton the cis manual they can be exempt ref repairs tro certain stuff - but possibly its more common than not for that stuff to be treated as being cis.
If company is known to be paying under cis i would not want to be arguing to vat office that work is non cis and that drc does not apply if custoemr is saying otherwise.
Regarding condition 4-Customer is CIS registered.
What's the treatment if the customer is not CIS registered but should be?
This is what I'd like to know too... I'm coming across this a lot. I contacted HMRC about it, who were clueless as usual, and just said they'd catch up with those who aren't CIS registered!
The legislation specifically says that excepted supplies are “supplies of specified services in respect of which a payment is not required to be included in a return made under regulation 4 of the Income Tax (Construction Industry Scheme) Regulations 2005.” (SI209/892, art 8(1)(a)). That means that un-excepted supplies are those which are required to be included in a return. That suggests to me that it does mean those who should be registered will be caught, not just those who are registered.
As with the VAT registration though – I don’t know how the supplier would be expected to establish that if the customer hasn’t realised.
What if the person is Gross Status for CIS. What happens then? Does it invoice VAT as normal or reverse charge?
Also in regards to lift or elevator repair and maintenance is outside the scope of CIS so i am guessing that DRC would not apply for companies like these?
"What if the person is Gross Status for CIS. What happens then? Does it invoice VAT as normal or reverse charge?""
Gross status has no relevance ref DRC - DRC equally applies for DRC in the same manner as non gross status.
"Also in regards to lift or elevator repair and maintenance is outside the scope of CIS so i am guessing that DRC would not apply for companies like these?"
Let the DRC flowchart be your friend (copied below) - if it aint cis it isnt DRC by default **
The mixed contracts element is probably the only bit that Hilary didn't comment on that needs to be "known" by peeps. For cis purposes on mixed contracts non cis work may be brought within cis - that is the elephant in the room when decision need to be made ref cis or not - none of teh guidance in that regard is particularly clear. Main thing is dont do owt without both parties agreeing whetehr cis and reverse charge applies - that should be settled before any invoices are ever issued !
** There is a quirk here in that if work aint cis therefore non DRC and other work is being done that is cis/DRC for same contractor - both parties can agree to treat everything as being DRC even though technically some of the work might be non DRC based on cis rules alone
https://assets.publishing.service.gov.uk/government/uploads/system/uploa...
A manufacturing business (customer) engages a construction firm (subcontractor) to supply construction services falling under the scope of CIS and
the total value supplied of all construction services purchased is well under the £3m in any 12 month period and
the customer is obviously the end user but has not expressly told the subcontractor as such.
It's basically for various building works on a manufacturing site
Is the customer obliged to register under the CIS Scheme ?
Do the services purchased qualify for DRC or otherwise be standard rated for VAT?
Must the customer verify the subcontractor under CIS rules to qualify for DRC, even if the customer cannot do so because they themselves are not registered under CIS?
"A manufacturing business (customer) engages a construction firm (subcontractor) to supply construction services falling under the scope of CIS"
This work is not "under the scope of cis" as cis does not apply ! explanation below
Ok confirmed not deemed contractor.
Cis can only apply if engager is "contractor" - as the engager is not involved in "construction services" other than getting work done on their sites its crystal clear to me that cis does not apply as the engager is nota "contractor for cis purposes" . As cis does not apply any work that would come within cis if cis had applied is not relevant/ignored ref cis . Its simply non cis end of.
This is confirmed in
CISR12020
CISR12030
CISR12040
CISR12030 says the folowing
Under the Scheme, the following businesses and individuals are NOT contractors:
Businesses or other concerns outside the mainstream construction industry whose average annual expenditure on construction work over the last rolling 12 month period does not exceed £3 million (See CISR12050 for more information about this).
https://www.gov.uk/hmrc-internal-manuals/construction-industry-scheme-re...
"Is the customer obliged to register under the CIS Scheme ?"
Nope for reasons outlined above
"Do the services purchased qualify for DRC or otherwise be standard rated for VAT?"
standard rated vat - DRC only applies when cis applies - see above link to flowchart.
"Must the customer verify the subcontractor under CIS rules to qualify for DRC, even if the customer cannot do so because they themselves are not registered under CIS"
As cis does not apply none of the cis rules come into play - work done is like any other invoice for services that is not cis related. No verifications needed.
Note subcontractors may not know that "engager" isnt within cis - so when engaging subcontactors the contractor should upfront make clear the work undertaken will not be within in the scope of cis as we are not a company within the scope of cis. This being the case please charge vat as normal (no DRC) - if you have any queries in this regard please contact opurselves for further clarification - blah.
"A manufacturing business (customer) engages a construction firm (subcontractor) to supply construction services falling under the scope of CIS"
This work is not "under the scope of cis" as cis does not apply ! explanation below
Ok confirmed not deemed contractor.
Cis can only apply if engager is "contractor" - as the engager is not involved in "construction services" other than getting work done on their sites its crystal clear to me that cis does not apply as the engager is nota "contractor for cis purposes" . As cis does not apply any work that would come within cis if cis had applied is not relevant/ignored ref cis . Its simply non cis end of.
This is confirmed in
CISR12020
CISR12030
CISR12040
CISR12030 says the folowing
Under the Scheme, the following businesses and individuals are NOT contractors:
Businesses or other concerns outside the mainstream construction industry whose average annual expenditure on construction work over the last rolling 12 month period does not exceed £3 million (See CISR12050 for more information about this).
https://www.gov.uk/hmrc-internal-manuals/construction-industry-scheme-re...
"Is the customer obliged to register under the CIS Scheme ?"
Nope for reasons outlined above
"Do the services purchased qualify for DRC or otherwise be standard rated for VAT?"
standard rated vat - DRC only applies when cis applies - see above link to flowchart.
"Must the customer verify the subcontractor under CIS rules to qualify for DRC, even if the customer cannot do so because they themselves are not registered under CIS"
As cis does not apply none of the cis rules come into play - work done is like any other invoice for services that is not cis related. No verifications needed.
Note subcontractors may not know that "engager" isnt within cis - so when engaging subcontactors the contractor should upfront make clear the work undertaken will not be within in the scope of cis as we are not a company within the scope of cis. This being the case please charge vat as normal (no DRC) - if you have any queries in this regard please contact opurselves for further clarification - blah.
Thanks. The key take for me on this is "DRC only applies when cis applies" and the need to make this plain to any subcontractor.
For a small one man band this stuff is far too complex and time consuming. A business with a turnover of less than £350,ooo should not be expected to comply but carry on in the old way. The Turnover could be the last annual accounts figure and if non-compliance then a Director should face personal consequences. The DRVC rules with the CIS rules for many are beyond comprehension and penalise many honest people for the few that are corrupt. As the commentator stated why should any VAT registered business to business need to bother with VAT at all. All these "add ons" by HMRC people who have nothing better to do are so complex they cause more errors than stress than they are worth.