Domestic Reverse Charge for building and construction services

Why now?

After two delays, there has been no indication from HMRC that the implementation of the Domestic Reverse Charge (DRC) will be delayed any further from its start date of 1 March 2021. 

Originally planned to come into effect from 1 October 2019, the domestic reverse charge was initially delayed for a year due to industry concerns that businesses were not in a position to implement the changes. There was then a further delay, until 1 March 2021, due to the impact of COVID-19.

1 March 2021 is quickly approaching, and there is no indication that HMRC will further delay the domestic reverse charge for construction services. 

Will you be affected by the DRC?

From 1 March 2021, the DRC will apply to supplies of standard rated and reduced rated VAT services made by a contractor to a sub-contractor where:

• Both the contractor and sub-contractor (in both cases, this can either be a business or an individual) are registered for UK VAT, and
• The supply of services falls within the Construction Industry Scheme.

Materials also supplied by a contractor, where these form part of the work, also fall within the DRC. 

Where the DRC applies, the responsibility for accounting for the VAT on a supply shifts from the supplier to the customer, except where the supplier is an end-user or an intermediary supplier. 

• A supplier is an ‘end user’ if it is a consumer or a final customer (i.e. the supplier does not make an onward supply of a construction service supplied to them),
• A supplier is an ‘intermediary supplier’ if it is connected to or linked to an end user.  

The DRC does not apply to employment businesses supplying staff, but will apply to labour-only construction services.  

What should you do to prepare?

To ensure you are fully ready from 1 March 2021: 

1. Check whether any services you supply or purchase fall within the DRC,
2. Confirm that your accounting systems are capable of handling the DRC,
3. Consider how this will affect your cash flow,
4. Ensure relevant staff are aware of the DRC, how it will work and the changes it will bring
5. If you supply services that fall within the DRC, establish a process to confirm whether your customers are end users or intermediary suppliers. Confirmation must be in writing.   

Why is it important to get this right?

If a customer is charged VAT incorrectly, it isn’t possible to recover this VAT from HMRC. 

Although HMRC will be applying a ‘light touch’ to penalties for the first 6 months, HMRC can assess for errors during this period and penalties may be considered if HMRC believes that a business is deliberately not accounting for the DRC correctly. 

For more information on how the DRC will affect charities, please see our most recent insight.  

If you would like to discuss how the VAT domestic reverse charge rules for construction services affect you and what you need to do to ensure you are compliant by 1 March 2021, please contact Robert Marchant or your usual Crowe contact.