09 Jan 2024
VAT: Domestic reverse charge for construction services
In March 2021, HM Revenue & Customs (HMRC) introduced the domestic reverse charge (DRC) for building and construction services. It is an important change to VAT accounting rules, implemented to reduce VAT fraud in the construction industry. But, in practice, it applies to a wide range of businesses both within and outside the sector. As we often work with businesses where these rules impact, it is timely to revisit the matter.
Firstly, in relation to situations where the procedure’s implementation is incorrect and needs fixing. Secondly, to flag potential benefits within the supply chain.
When the domestic reverse charge applies
The DRC applies to VAT-registered businesses that supply specified services. HMRC’s definition of “construction operations” is wide ranging, but generally falls within the scope of the Construction Industry Scheme (CIS). As a result, many businesses that are not primarily considered to be in the construction industry may still be subject to the CIS rules.
It is important to ensure that any dealings with the reverse charge are correct. If a supplier has charged VAT where they shouldn’t have, HMRC will now issue assessments and related penalties and interest charges where customers have recovered VAT.
If the reverse charge applies, the sub-contractor does not charge VAT on invoices. Instead, the recipient (the contractor) will account for the VAT in their returns as both output tax and input tax. For authenticated receipts, the recipient will deal with the VAT on the reverse charge as applicable.
In most cases this results in a ‘nil’ net VAT effect for the contractor unless their input tax recovery is restricted.
This meant many businesses needed to change the way they account for VAT on both sales and purchases. It creates an extra administrative burden due to additional record-keeping requirements and necessary changes to their accounting systems.
How we can help
We advise on a wide range of aspects of the DRC. This includes undertaking a review of the supply chain as well as commercial and accounting records, such as contracts and invoices, to ensure that the DRC is dealt with correctly. In particular, we look at:
- Identifying whether the reverse charge is applicable and understanding the impact on your business
- Best practice for DRC notifications (whether making and/or receiving)
- The categorisation of end user and intermediaries, including making or receiving an end user or intermediary notification for supplies – errors here can mean incorrect charges; under-declarations of VAT; and potential penalty charges
- The VAT registration and CIS status of suppliers and customers
- Charging (or being charged) VAT and notification of DRC/VAT status
- Applying the correct wording to your invoices/authenticated receipts and contracts
There are a number of areas to consider when making or receiving supplies that could fall within the reverse charge and whether you or others in your supply chain have treated these correctly. There are also potential opportunities to improve cashflow around the DRC.
Further information
To ensure your business is VAT and CIS compliant, we can offer a review of your records and contracts to ensure that you have dealt with matters correctly. We can also assist with implementing approaches to your customers, suppliers and HMRC.
In addition, we provide training and other support. This includes implementing procedures within your accounts department. We also ensure that those involved with contract negotiation fully understand how to correctly apply the reverse charge moving forward, as well as other VAT and CIS aspects.
We have an experienced VAT and CIS team at PKF Francis Clark, who are happy to discuss this with you and review your reverse charge procedures and records. In the first instance, you can get in touch with Michelle Branch or Joe Rowsell.
For any other property-related queries, please contact one of our experts.
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