Questions build around DRC rules for constructionby
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.
Since the new domestic reverse charge (DRC) rules came into effect for the construction industry on 1 March 2021 there has been confusion over whether the required conditions have been met.
First, let’s have a recap. The DRC rules only apply when all five of the conditions are met:
- Supply is one of specified services within the scope of the Construction Industry Scheme (CIS)
- Supply is standard rated or reduced rated
- Customer is (or should be) VAT registered
- Customer is CIS registered
- Customer is making an onward supply.
If any one of those conditions is not met, the reverse charge does not apply and VAT should be charged by the supplier as normal. This is shown quite helpfully on HMRC’s flowchart.
Where the reverse charge applies, the supplier does not charge VAT on the invoice. Instead, the customer declares the VAT themselves by including it in box 1 on their next VAT Return. The VAT may then be recoverable by them in box 4, subject to the normal rules.
If VAT is charged and it shouldn’t have been, there is a risk to the customer that HMRC will disallow recovery of the VAT.
If VAT is not charged and it should have been, there is a risk to the supplier that HMRC will raise an assessment in respect of VAT undercharged.
Where my clients have had issues with this, it generally comes down to a difficulty in establishing whether one or more of the five conditions have been met.
Standard or reduced-rated supply
It is still the responsibility of the supplier to establish the VAT rate applicable to the transaction, even if they are not the ones who account for it to HMRC.
Is customer VAT registered?
Where the customer is VAT registered, this is fairly easy to establish, as they can provide their VAT registration number to the supplier.
If they are not VAT registered but should be, how on earth is the supplier supposed to establish that if the customer, who actually has all the relevant information in front of them, hasn’t realised it?
In some circumstances, it may be prudent for the supplier to obtain a statement from the customer along the lines of: “We confirm that we are not VAT registered and are not required to be”. That puts the ball back in the customer’s court should HMRC question the treatment.
It is worth noting that whereas usual reverse charge supplies count towards the customer’s VAT registration threshold, in this case they do not. Those supplies do, however, count towards the supplier’s VAT registration threshold, so registration would still be required, even if all supplies made fell within the reverse charge rules.
Is customer CIS registered?
Once again, the supplier must rely on information provided by the customer.
Be aware that a business is treated as a building contractor for CIS purposes if it spends more than £3m on building work in a 12-month period and so some businesses that do not at first glance appear to be in the construction industry may be caught.
It is possible to check CIS status online with HMRC.
Making an onward supply
For the reverse charge to apply, the customer must not have notified the supplier that they are the end user or an intermediary in relation to the supply. If the customer has notified the supplier that they are an end user or intermediary, the reverse charge will not apply and the suppliers should charge VAT.
The main issues I have seen around this condition come down to a lack of communication between the two parties. The supplier may have understood the customer was not the end user but the customer has said they are.
In other cases, the supplier was led to believe the customer is the end user but customer has not made an end-user notification. The key point is not whether the customer is the end user but whether they have notified the supplier they are the end user.
To avoid future problems, try to have a frank and open dialogue with your customer/supplier and ensure all discussions and conclusions are documented.
This is by far the condition that has provoked the most questions.
HMRC does provide a list of specified services but, of course, most activities that happen in real life do not neatly fall under any of the descriptions.
The difficulty is that the list of specified services is taken from the CIS rules, which the person dealing with the VAT may not have any experience of. Until last year, I had successfully avoided having to know anything about CIS tax so it has been a steep learning curve for me as well.
The information I have found most helpful is actually in HMRC’s CIS guidance, rather than their VAT guidance. In CISR14330, HMRC provides an alphabetical list of different types of work. Each one links to a more detailed explanation and a lot of examples of when those types of activities will be caught by CIS and when they will not.
It is a hugely valuable resource and I would suggest it as a first stop for anyone trying to establish whether a supply is or isn’t a specified service.
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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...