Domestic reverse charge VAT (or DRC) changes how UK construction companies pay VAT. It was introduced in 2021 to prevent fraud and ensure that HMRC receives all the due VAT payments. Read on to discover how it works and how DRC VAT will affect your business.
How does DRC work?
If your construction business is VAT-registered and is part of the Construction Industry Scheme, the responsibility for paying VAT rests with the contractor rather than the subcontractor under DRC. First, you must determine whether your customer is the end user or a contractor. Generally, the end user doesn’t supply any building or construction services, but a contractor does. For example, an end user might be a private homeowner who employs you to carry out work on their home. If you then employ a subcontractor to carry out electrical work, you may be responsible for paying the VAT.
When will my business need to follow DRC rules?
Standard VAT rules will still apply in some circumstances. To determine whether DRC rules apply, you’ll need to look at the VAT status of the parties involved and consider who is an end user and who’s a contractor or subcontractor.
DRC only applies to VAT-registered businesses, so it won’t affect you if your business revenue is below the VAT threshold. Likewise, it won’t apply if your customer is the end user, whether they’re VAT registered or not.
DRC applies if you’re a subcontractor working for a contractor. If your business operates as both a contractor and subcontractor, you’ll need to decide whether you need to pay VAT under DRC for each project. If your customer is the end user, the standard VAT rules apply, but if they’re supplying services to the end user, then DRC will apply.
You can use this flow chart as a guide:
The DRC payment process
If you’re a VAT-registered subcontractor, you’ll need to show the VAT on your invoices, but you won’t receive it from your customer. Instead, they’ll pay it to HMRC. So you’ll need to make it clear that the direct reverse charge applies when you issue your invoice. Unfortunately, this could cause you some cash flow issues in the short term as you won’t receive the VAT payment.
As a contractor, you’ll need to account for the VAT charged by your subcontractor as output tax on your VAT return but also treat it as input tax to be reclaimed. This means that while you’ll need to pay VAT on your subcontractors’ behalf, you can also claim it back.
What information will we need?
Before you pay reverse charge VAT on your subcontractor’s behalf or ask a contractor to pay it for you, you’ll need to carry out checks to ensure that DRC rules apply. Ideally, the end user will confirm that they are an end user in writing. The contractor and subcontractors can then keep a copy to confirm how VAT should be charged and paid.
You’ll also need to confirm whether each contractor or subcontractor working on a project is both VAT and CIS registered by checking online at www.gov.uk/check-uk-vat-number. You must also talk to your accountants regarding your VAT return. As a subcontractor, the new rules may cause you some temporary cash flow issues. Your accountants can help you devise a plan to lessen the impact.
You can find more information about the reverse charge from HMRC: https://www.gov.uk/guidance/vat-reverse-charge-technical-guide.
If you need to pay VAT via the Domestic Reverse Charge, we are here to help; simply complete the form: