The Domestic Reverse Charge (DRC) changes the way construction VAT 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 is 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 normal 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 are 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, consequently they fall back to charging VAT under the normal rules. Both DRC and Non-DRC invoices may be issued for the same service.
The DRC rules affect cashflow as the supplier no longer has a period where it holds onto the customer’s VAT before paying it to HMRC, consequently VAT repayment situations are much more common.
Copyright © 2018 Kelpie Accounting and Tax Ltd - All Rights Reserved.
Director - Ian Blackwood CA CTA