Gerry Myton, Partner & Head of Indirect Tax at Streets Chartered Accountants discusses the domestic reverse charge.
The domestic reverse charge (DRC) will be introduced on 1 October 2019 and it will apply to:
1. Supplies at the standard or reduced rates of VAT;
2. Where payments are required to be reported through the Construction Industry Scheme CIS; and
3. Where both the supplier and the customer are VAT registered, or required to be (note that supplies made under the DRC do not count towards the threshold).
Therefore, supplies between sub-contractors and contractors (CIS definition applies), will be subject to the reverse charge unless they are supplied to a contractor who is an ‘end user’. End users are those who receive building and construction services but do not onward supply those services.
In that regard it will not apply where:
1. Services are supplied to the end user, such as the property owner, or directly to a main contractor that sells a newly completed building to the customer;
2. The recipient makes onward supplies of those construction services to a connected company;
3. The supplier and recipient are landlord and tenant or vice versa; or
4. The supplies are zero-rated.
For the avoidance of doubt, construction services that include materials fall with the DRC as initially, there was a suggestion that the DRC applied to labour only contracts.
HMRC have acknowledged that businesses might have difficulty in implementing the DRC and have indicated that ‘light touch’ will be applied in the 6 months post 1 October 2019 in regard to errors. It is worth noting that the light touch will not apply to those who knowingly claim end user status. Readers might wish to refresh their working knowledge of the VAT penalty regime.
It is recommended that businesses in the construction sector:
* Review all contracts with regular suppliers to determine the exposure to the DRC and put in place procedures for new contracts;
* Review their accounting systems so that supplies made under the DRC are entered correctly onto the VAT Return;
* Consider the cash flow implications of the DRC and make appropriate arrangements;
* Review VAT return periods to determine whether monthly VAT return periods are worth the additional administrative burden; and
* Where customers claim end user, get written confirmation of this fact.
If you have any queries regarding the above changes, please contact Gerry Myton email@example.com