The government are introducing Domestic Reverse Charge for construction to reduce VAT fraud within the construction sector. The scheme is effective from 1st March 2021 and is mandatory for most construction businesses. HMRC will collect VAT due on sales directly from the customer, rather than from the supplier.
As well as process changes, the new scheme may have an adverse impact on your cashflow, so it’s vital that you start planning now.
Does the Domestic Reverse Charge apply to my business?
You must apply the Domestic Reverse charge when you meet all of the following conditions:
- Your business is UK VAT registered.
- Business activity and that of your customer is within the scope of the Construction Industry Scheme (‘CIS’).
- Both your business and your supplier are CIS registered (check on gov.uk).
- You charge VAT at the standard or reduced rate.
- Customers are not end users (they must tell you in writing).
- You are not ‘connected’ to your customer (again, they must tell you in writing if they are an intermediary).
- It is a ‘business to business’ transaction.
Here’s HMRC technical guidance.
How will the Domestic Reverse Charge affect my business?
- Review and revise your cashflow forecasts, as cash receivable from sales invoices will be reduced.
- You may require additional cashflow finance.
- The VAT cash accounting and flat rate schemes cannot be used where the Domestic Reverse charge applies.
- Review your current VAT scheme to determine if it is still the best option.
- Withdraw from your existing scheme at 1st March 2021 if necessary.
VAT reporting dates
- Will you be a repayment trader? When the majority of your sales fall within the Domestic Reverse Charge scheme and you are incurring VAT on purchases you could be entitled to reclaim VAT from HMRC.
- Consider monthly VAT reporting. This means you only wait a month (rather than a three) for a VAT refund.
Software & administration
- Contact your accounting software provider to ensure existing software has been updated for the requirements of the scheme. (Xero is ready to handle the new scheme).
- Review the layout of your invoices and check they are compliant with the scheme requirements.
- Ensure you make the correct entries on your VAT returns.
Need help preparing?
We have in-depth knowledge of the construction sector and taxes, and work closely with construction clients every day. As Xero specialists, we can help you set up your billing and show you how to record the checks you’ve carried out. In addition, we can look at the impact of the scheme on your cashflow, and recommend any changes to your VAT scheme.
If you’d like help getting ready, our review will look at the impact of DRC on your business, and provide your action plan.