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Unlock Opportunities with Domestic Reverse Charge in the UK

Are you a VAT-registered business in the UK construction industry? If so, Domestic Reverse Charge (DRC) is an important topic you need to be aware of! Don’t worry, we're here to help!

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What You Need to Know about Domestic Reverse Charge

Domestic Reverse Charge is a VAT mechanism introduced by HMRC to combat VAT fraud within the construction sector. It shifts the responsibility for paying VAT from the supplier to the customer in certain transactions, affecting how VAT is accounted for in the supply chain.

VAT Responsibility Shift

VAT Responsibility Shift

Under the scheme, the recipient, not the supplier, accounts for VAT, reducing fraud risk in construction services.

Cash Flow Impact

Cash Flow Impact

May affect cash flow as businesses receiving supplies must account for VAT, potentially altering financial planning and invoicing processes.

Eligible Transactions

Eligible Transactions

Applies to specified construction services between VAT-registered businesses, excluding end-users or intermediaries not making onward supplies.

Compliance Requirements

Compliance Requirements

Requires understanding of VAT treatment changes, ensuring accurate record-keeping, and updating accounting systems to comply with HMRC regulations.

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To tackle the prevalent VAT fraud in the construction sector, the government introduced Domestic Reverse Charge (DRC) rules with effect from 1 March 2021. Under the domestic reverse charge (DRC) rules, as name suggests, the customer instead of the supplier is liable to account for and pay the VAT to HMRC.

For example, Developer Ltd is constructing an office building and uses Construct Ltd as builders to carry out the work on the construction site. The agreed total price for the contract is £100,000. On usual case, Construct Ltd would have issued invoice of £100,000 plus 20% VAT of £20,000 and Developer Ltd would have paid £120,000 to the Construct Ltd and Construct Ltd would in turn pay £20,000 to HMRC. However, under DRC rules, it is responsibility of the Developer Ltd to account for £20k VAT and so it will pay only £100k to the Construct Ltd. 

What falls within the scope Domestic Reverse Charge (DRC)?

As a general rule, only those services that are within the scope of CIS is affected by DRC rules. This means the DRC applies to specified construction services such as construction of buildings, painting, decorating, heating installation, etc.

However, unlike CIS, DRC will extend to any building materials on the invoice if is part of the single supply of construction services.

Also, where an invoice contain some services liable to the DRC and some not, then the entire invoices is liable to the DRC.

What falls outside the scope of Domestic Reverse Charge (DRC)?

Following are generally outside the scope of the DRC:

How you show DRC in VAT Return?

If you buy services subject to the reverse charge, you must enter the VAT charged as output tax in box 1 of your VAT return. If you eligible to claim VAT on the reverse charge purchases, you would also enter the VAT in the box 4 of your VAT return.

Suppliers should not enter any output VAT on sales under the reverse charge in the box 1 of VAT return as this will be accounted by the customer. However, supplier still need to enter the net sales in the box 6.

What should be mentioned in the invoices issued by Suppliers of DRC?

When supplying a service subject to DRC, the suppliers must show all the information required on a VAT invoice (as usual) plus following additional things:

HMRC has provided an example of DRC invoice as in the link.