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VAT domestic reverse charge: Your questions answered

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Rickie Lowery answers four key questions about the VAT domestic reverse charge (DRC) rules raised by AccountingWEB readers.

8th Dec 2021
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The full HMRC technical guide to the VAT domestic reverse charge is worth bookmarking, but in summary the key points are:

  • The rules broadly apply to transactions between VAT registered businesses within the construction industry scheme (CIS) where the customer is not the ‘end user’ (the end user being someone who will not be making an onward supply of construction services).
  • If the rules apply, the supplier/subcontractor issues their invoice without VAT but with a note as to the rate of VAT that would have applied. That supplier records the sale in box 6 of their VAT return.
  • The customer/contractor must then include the purchase in box 7 as usual and the VAT that would have been charged in box 1 of their return. The same VAT figure is included in box 4, subject to any partial exemption adjustments.
  • If the DRC rules do not apply then VAT is charged as usual.

Below are a selection of common queries and their answers regarding these new rules.

Q1: DRC and the flat rate scheme

I have a client who makes and receives supplies within CIS and is registered for VAT using the Flat Rate Scheme (FRS). All of their customers have confirmed they are not end users. How do the DRC rules apply for FRS businesses?

Ordinarily a trader within the FRS would issue and receive invoices exactly as if they were a ‘normal’ VAT registered trader. However instead of paying the net amount of VAT to HMRC they pay over a fixed percentage of their VAT inclusive sales.

Generally, input tax paid would not be recoverable, except where the supply is of a single capital item costing at least £2,000 (including VAT).

Overall, this leads to a potential cash advantage, especially if their expenses do not tend to include VAT, as they pay over less VAT than they collect.

This advantage is lost for transactions under the DRC. Such transactions are not accounted for under the FRS rules, the client will therefore need to issue invoices for any DRC supplies without VAT, the same as for all other businesses.

If the invoices they receive are within the DRC rules, they will not be charged VAT. If they are not within the rules, any VAT charged will be irrecoverable.

It may therefore be worth leaving the FRS, as this would potentially have no effect on the invoices issued while allowing the recovery of VAT incurred.

Q2: Can the DRC apply but CIS does not?

My client has issued an invoice to a customer and noted the supply is within the DRC, so the customer must account for the VAT. The customer has paid the full amount invoiced, but without any deduction for CIS. My client does not have gross payment status for CIS, will this ever be the correct outcome?

The short answer is no. For the DRC rules to apply, at least part of the transaction must be within CIS. The reverse situation, where CIS is deducted but the DRC rules do not apply, is however possible.

Ordinarily if CIS applies to any part of the transaction, the DRC rules catch the whole transaction. However, if the CIS element is 5% or less of the total, the whole transaction will fall outside the DRC rules.

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Replies (6)

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By Jpbuckley8
09th Dec 2021 10:51

Does the DRC apply to labour only or the invoice total i.e labour and materials?
We're seeing lots of invoices where this varies depending on what system the invoice is created on would be great to hear your opinion
Thanks

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Replying to Jpbuckley8:
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By Paul Crowley
09th Dec 2021 11:18

Entire invoice
I understand the idea being to stop the companies in the chain disappearing with the VAT

Thanks (1)
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By North East Accountant
09th Dec 2021 12:55

Where the customer/contractor should be CIS registered but isn't does the supplier still apply DRC?

Thanks (0)
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By johnjenkins
09th Dec 2021 13:11

Sledgehammer to crack a nut. I see no reason why VAT registered companies should charge and pay VAT over. Far simpler to just put both VAT numbers on invoices and no money changes hands, so that the only money that goes to CE is what is really due, namely vat from Joe public and those unregistered business.

Thanks (0)
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By blackcat
09th Dec 2021 17:06

How does DRC work if the sub-contractor has Gross status for CIS?

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Replying to blackcat:
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By johnjenkins
10th Dec 2021 09:48

CIS has nothing to do with VAT.

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