If you are in the business of buying or selling construction services, then the 1st October 2019 is an important date for the diary. A new VAT anti avoidance rule known as the Domestic Reverse Charge (DRC) is being introduced which fundamentally changes the way construction invoices are raised by the sender and then processed by the recipient.
The businesses affected by the DRC are those in the construction supply chain who fall within the Construction Industry Scheme (CIS). It does not however apply to zero rated construction services. The invoicing of construction services at each step in the supply chain will be affected, the exception being the invoice raised to the end user. The end user is someone who themselves doesn’t supply CIS services.
Under the current rules it is the supplier that is responsible for charging VAT correctly and paying it across to HMRC. With the DRC this familiar obligation on suppliers to charge VAT will stop. Suppliers instead will be required to validate their customer VAT numbers, they then raise a DRC invoice with no VAT added. The customer receiving an invoice with DRC wording calculates the VAT amount and accounts for it as an amount owing to HMRC. At the same time, to the extent they are eligible to, the customer reclaims this VAT back. These opposite VAT entries of self-charge and reclaim will often cancel out.
Where a supplier is dealing with a customer that is not VAT registered, they will have no VAT number to verify, and will fall back to charging VAT under the normal rules. Invoicing processes must therefore be capable of issuing both DRC and Non-DRC invoices for the same service.
The DRC rules affect cashflow as the supplier will no longer have a period where it holds onto the customer’s VAT before paying it to HMRC, consequently VAT repayment situations will be much more common. A final point is that the change in VAT obligations on both the customer and supplier need to be taken account of in legal contracts.