The domestic reverse charge changes the way construction contractors account for VAT. But contractors in the Construction Industry Scheme should not assume all activity is covered by the domestic reverse charge.
The domestic reverse charge, or DRC, was finally implemented in the UK on March 1, 2021. It effectively means the buyer, a contractor, must account for VAT rather than the supplier, a subcontractor.
It was created by the government to sit alongside the Construction Industry Scheme, CIS, to ensure those working in the construction industry pay the right amounts of VAT. It applies to all VAT-registered businesses. Contractors providing services directly to an end-user, a homeowner, for example, or where one party is not registered for VAT, do not need to apply the DRC.
The domestic reverse charge is applied to a prescribed set of services outlined by the CIS. These include demolition, construction and repairs to a building, installation of utilities, and cleaning or decorating on a construction site. The DRC will also apply to contractors working on large infrastructure projects, such as roads, rail, powerlines, waterways and coastal protection schemes.
The government also provides guidance in what services do not fall into the DRC regime. These include manufacturing parts and materials for the construction industry, the installation of security systems and drilling or extraction.
Professional services providers, such as architects and surveyors, will generally not be drawn into the DRC regime, but certain activities, such as project managing a scheme, can be caught.
Confusion remains, however, on the provision of certain services. One such example is the maintenance of internal lifts and stair lifts. Their installation is covered by the DRC, yet any ongoing repairs and maintenance is not.
Businesses caught in the DRC will need to need to raise special invoices that clearly state ‘reverse charge’ showing the amount of VAT that is payable and CIS deductions. DRC sales will also need to be accounted for on VAT returns separately from non-DRC sales.
The introduction of the DRC represents a major change in the way VAT is accounted for and paid by the construction industry, and it is perhaps not entirely surprising that there remains some confusion.
One area that we have seen causing problems is around defining CIS operations. Confusion remains over what is exactly covered by the CIS and who makes that decision. It often involves convoluted discussions with HRMC.
To date, HMRC is taking a lenient approach to mistakes and non-compliance and has said it will adopt a light touch approach to policing the regime. However, given this is an anti-fraud measure, construction industry contractors should make sure they understand and comply with the DRC regime.
The DRC continues to prove challenging for the construction industry. Contractors and their clients are encouraged to take advice on how the DRC is accounted for if they are unsure.
A full list of the construction operations that are included can be found here