DRC 6: Tips for cash flow managementby
Neil Warren explains how builders can cope with the cash flow challenges of the new DRC rules, whether VAT invoices can be split, and when to file monthly VAT returns.
The introduction of the domestic reverse charge (DRC) for builders will have a big impact on the working capital of many builders selling construction services.
For example, a builder using the cash accounting scheme who received £84,000 including VAT on 1 January 2021 will not have to pay the £14,000 of VAT to HMRC until 7 May, if he submits calendar VAT quarter returns.
But that will change on 1 March 2021 if the work is subject to the reverse charge, ie £70,000 will be paid by the customer without VAT. Is there still scope to charge some VAT to help the cash flow position of the seller?
Split labour and materials?
Could the builder raise separate sales invoices for each reverse charge job; one for labour (no VAT), and one for materials linked to the job (20% VAT)?
The answer is ‘no’ and HMRC’s guidance deals with this suggestion:
“If a customer places a single supply and fix order within the scope of the CIS with a supplier, the reverse charge will apply to the full value of the order even if the supplier issues separate invoices for the supply and fix elements,” (see HMRC guidance, para 7).
You might wonder if a solution is to raise separate orders for labour and materials, but HMRC is on the ball again:
“If the works are to be provided at the same time and on the same site...they comprise a single supply for VAT purposes,” (see HMRC guidance, para 7).
It is important that builders receiving DRC services are alert to possible invoice splits being proposed by a seller. As I explained in DRC 3, a priority for businesses receiving construction services is to not accept a VAT charge from a builder if the reverse charge should apply.
Monthly VAT returns
If most or all of a builder’s work will be subject to the DRC, it might be sensible to accelerate input tax recovery by electing for monthly rather than quarterly VAT returns. This will mean extra administration work – 12 VAT returns a year instead of four. But it will provide a cash flow boost if a builder has a lot of input tax to claim on, say, materials.
If a builder receives a reverse charge invoice from another builder, he must apply the reverse charge according to the invoice or payment date, whichever happens first. This will usually be the invoice date. If a builder uses the cash accounting scheme, the principle of entering purchase invoices on VAT returns according to the payment dates does not apply to DRC supplies.
This series of articles has considered important technical and procedural details about the new DRC rules. However, there are three main priorities for builders and advisers to consider, that will hopefully produce a smooth outcome for most DRC transactions:
- Scope of the DRC
Identify if a job is subject to the new DRC rules – this is important for both customers and suppliers. Don’t forget to use the clear flowcharts issued by HMRC for both suppliers and customers, which I highlighted in DRC 1.
Deal with the paperwork and VAT returns correctly. This not only relates to sales invoices issued by builders but also the terms and conditions of proposed contracts. For example, confirming if an end user or intermediary supplier situation will apply.
Also don’t forget to check that your suppliers and customers are genuine, for which you can use HMRC’s VAT number checker service.
- Cash flow
The new DRC rules will produce massive cash flow challenges for many builders selling DRC services, and these need to be considered as soon as possible. Builders selling services should think about electing for monthly VAT returns and possibly asking their bank for an increased overdraft facility.
To hear more about the incoming domestic reverse charge regime, join Neil Warren alongside our panel of experts in our Any Answers Live Webinar where we explore how you can prepare your clients for the new change in the construction industry.