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HMRC gives Construction companies extra time to get ready for the implementation of the Domestic Reverse Charge VAT

Posted: Wednesday, October 2, 2019

Author: Darren Posnack

12 Additional Months To Prepare For Domestic Reverse Charge VAT (DRC)

HMRC have delayed the implementation of the VAT Domestic Reverse Charge for building and construction services until 1st October 2020. So if you work in the Construction Industry you have another 12 months more breathing space to get your house in order.

HMRC have said that this delay is to give businesses additional time to prepare for the impact on business’s financial administration and prepare for any adverse cash flows that may arise as a consequence.

If you’ve already prepared your business for the original start date of this October, then fantastic you’re ready for its implementation next year.

However if you were struggling to be ready for October 2019 then you have another year to complete your preparations.

If you’ve not heard about the DRC then you really need to understand if this applies to your company and if it does, how to start preparing your business for the change, so you are ready for October 2020.

HMRC have said that they will be focusing on the construction sector in the next 12 months to expose any avoidance, so the earlier you are ready the better.

A Quick Overview Of The DRC

If you are not sure what Domestic Reverse Charge VAT is and what it means for your business here’s a quick guide.

The DRC is a change in how VAT is handled for certain kinds of construction services in the UK, along with the building and construction materials used directly in those services.

If your company is registered for VAT in the UK you may be required to account for reverse charge VAT. The DRC means the customer receiving the specified service has to pay the VAT to the HMRC instead of the supplier. The customer can then recover the VAT, subject to the normal VAT recovery rules.

In even simpler terms, for services they provide, sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC. The payment received will be for the cost of the work done (plus materials used).

The DRC doesn’t apply to building and construction materials supplied separately and independently of any construction services.

The DRC is an extension of the Construction Industry Scheme (CIS) and applies only to transactions between VAT-registered contractors and sub-contractors who are registered with the CIS.

The reverse charge will affect building and construction services supplied at the standard or reduced rates that also need to be reported under CIS.

Please note: There is a key difference between the CIS scheme and the DRC. Under the DRC, materials are included within a service. The DRC does not apply if a service is zero VAT rated, or if the customer is not registered for VAT in the UK. It also does not apply to some specific construction services.

Please see the services list below as detailed by HM Revenue & Customs

Construction Services Affected By The DRC Include:

  • constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
  • constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours
  • pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
  • installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
  • internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
  • painting or decorating the inside or the external surfaces of any building or structure
  • services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works

Construction Services Excluded From The DRC Include:

  • drilling for, or extracting, oil or natural gas
  • extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
  • manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
  • manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
  • the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
  • making, installing and repairing art works such as sculptures, murals and other items that are purely artistic
  • signwriting and erecting, installing and repairing signboards and advertisements
  • installing seating, blinds and shutters
  • installing security systems, including burglar alarms, closed circuit television and public address systems

We understand that HMRC will initially apply a ‘light touch’ in dealing with any VAT errors made during the first 6 months after the DRC comes into force in October 2020, as long as your business is making best efforts to comply with the new legislation.

However, any errors need to be corrected as soon as possible, as the longer under declared or overcharged sums remain outstanding the more difficult it may be to correct or recover them.

Penalties will only be considered during this period if you are deliberately taking advantage DRC by not accounting for it correctly.

Getting Your systems ready for the DRC

If your construction business uses Sage 50 or Sage 200 accounting software you may need to upgrade your software in plenty of time for the start of the DRC in 2020. However if you do not currently use the EU Reverse Charge VAT codes, then you may be able to remain on your current version. The same applies to any users of Eque2 construction business management software. There is now an updated version available that will deal with the DRC, in conjunction with your accounting software.

Whilst using accounting and business management software optimised for the construction industry isn’t compulsory, it will make it much easier for you to ensure that your business correctly adheres to the changes to VAT charging under the Domestic Reverse Charge.

Please contact the Utilize Service Desk, if you have any questions about Domestic Reverse Charge VAT and how Sage accounting software can help ensure your compliance.

Further Information On The DRC, Sage and Eque2 Can Be Found Here:

https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
https://www.sage.com/en-gb/blog/vat-reverse-charge-construction/
https://www.sage.com/en-gb/blog/vat-domestic-reverse-charge-checklist/
https://ask.sage.co.uk/scripts/ask.cfg/php.exe/enduser/std_adp.php?p_faqid=44845
https://www.eque2.co.uk/domestic-reverse-charge-vat/

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