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Domestic reverse charge: Construction workers standing on outdoor construction site and discuss the building plans.

Domestic Reverse Charge 5: How it impacts VAT schemes


Neil Warren explains the effect of the new domestic reverse charge rules on users of the VAT flat rate scheme for small businesses and the VAT cash accounting scheme.

9th Feb 2021
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The flat rate scheme (FRS) has always been complicated for builders. Such businesses can fall into two different flat rate categories depending on their purchases of building materials in each VAT period, with flat rates of 9.5% or 14.5%.  

Labour only builders may fall into the category of a ‘limited cost business’ with its barely tax-efficient flat rate of 16.5%. 

All construction industry sales invoices that are captured by the new domestic reverse charge rules are excluded from the VAT return of a scheme user. There is no tax to pay in box 1, and the net sales value is excluded from box 6 (outputs) of the VAT return.

If a builder makes a lot of reverse charge sales, it makes sense to leave the FRS on 28 February 2021, and revert to normal VAT accounting. Input tax can then be claimed on expenses such as materials, tools and overheads. A FRS user can only claim input tax on capital goods costing more than £2,000 including VAT.

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Replies (3)

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By John Adamson
10th Feb 2021 11:32

Clients need this change like a hole in the head right now! It beggars belief that this is still scheduled to go ahead at this precise time with all the other things going on and survival the main consideration for most businesses. I have been in practice 30 plus years and have not come across fraud in the building industry to warrant such changes as this. Also, doesn't this push the VAT bad debt risk for HMRC further up the food chain, so the lossses are likely to be much larger?

Thanks (4)
By Gone Sailing
10th Feb 2021 15:37

This is to avoid fraud?
But the contractor needs to be in CIS?

Thanks (0)
13th Feb 2021 09:06

Can I just check that there is no compulsion to leave the FRS or CAS if you make supplies under the DRC?

Is it that one "just" has to account for DRC supplies on the invoice basis, while other supplies remain subject to the existing scheme?

Thanks (0)