The new VAT domestic reverse charge (DRC) is due to come into effect in the UK on 1 March 2021.

What is the VAT domestic reverse charge?

It’s an anti-fraud measure designed to cut down on ‘missing trader’ fraud, where companies receive high amounts of VAT from their customers but have no intention of ever paying the VAT to HMRC.

It doesn’t apply for services supplied to non-VAT registered individuals or businesses.  So work carried out for homeowners/domestic users should be invoiced in the usual way.

Will it affect me?

If your business is part of the Construction Industry Scheme then you will be affected by the legislation, so it’s important that you understand how it will affect your business and processes as the VAT DRC will be a mandatory requirement from 1 March 2021.

If you are a VAT registered subcontractor (supplier) and:

• your supply is standard (20%) or reduced (5%) rated, and
• your customer is VAT registered, and
• your customer is registered for CIS, and
• your customer isn’t the end client/customer,

Then the reverse charge applies. You do not charge any VAT on your sales invoice.

If you answer no to any of the above, then normal VAT rules apply.

If you are a VAT-registered contractor (customer) you will instead account for both input and output tax on invoices you receive from your VAT-registered subcontractors.

Cash flow and VAT returns

You may find yourself in a net refund VAT position, as you will be paying VAT on materials purchased, (Gross cost) but will not be charging VAT on invoices that come under the VAT DRC (Net receipt).  It may be worth considering moving from quarterly to monthly VAT returns to assist your cash flow.

Xero

DRC is now live in Xero. Read the  Xero Central guide for more information. This will guide you through adding specific DRC tax rates to your Xero organisation. If you are a Figure Fairy bookkeeping client, then we have updated this for you already.  If you would like some support on doing this, please get in touch.

Your invoices must clearly state that the reverse charge applies, and that the customer will pay the VAT to HMRC.  It is advisable to set up a DRC invoice template.

QuickBooks

Quickbooks has informed its users that the DRC will be in place by 1 March 2021. Read about CIS in QuickBooks on their website here.

Additional useful resources

For more information on the VAT DRC for the building and construction industry read HMRC’s notice or watch their webinars.  The flowcharts are also very useful.

 Email us at info@figurefairy.com or call 01208 369972. You can find all of our contact details on our Contact Page.

Welcome to Figure Fairy  Ltd - Chartered Accountants Bodmin, Cornwall. We provide accountancy and bookkeeping services to businesses in Cornwall and beyond, including Bodmin, Camelford, Callington, Launceston, Liskeard, Looe, Lostwithiel, Newquay, Saltash, St Austell, St Blazey, Torpoint, Truro, Wadebridge and Slough.

We are Xero specialists, but are happy to work with other accounting packages, such as  Quickbooks & FreeAgent.