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VAT: Domestic Reverse Charge – What Does it Mean for Your Business?

September 10, 2019 - Finances - 5 minutes

What does DRC stand for? You’ve come to the right place.

It’s important to make sure your business is prepared for VAT: Domestic Reverse Charge (DRC). These changes are coming to the building and construction industry on 1st October, 2020.*

*(UPDATE: changes are now due to be implemented 1st March 2021).

Below, we’ve prepared an overview of what’s happening. While it’s true that VAT isn’t always the most exciting topic (no surprises there), the changes are of great importance, so you need to make sure you’re aware and that your business is ready. 

We’ve listed some information that covers the basics of DRC, like what does DRC stand for, and, should yours be affected by the changes, there’s also advice on how best to prepare.

In addition, be sure to download our visual infographic to DRC at the end of this post.

  1. What does DRC stand for? What’s happening?
  2. How will this impact my business? 
  3. What should I do? 
  4. Who should I talk to if I have questions?

1. What does DRC stand for? What’s happening? 

DRC stands for Domestic Reverse Charge.

On 1st March 2021, new rules come into effect that change the way VAT is collected in the building and construction industry. 

The changes mean that the customer receiving a service will have to pay the VAT that is owed to HMRC, rather than paying it to the supplier, who’d otherwise pay HMRC on their behalf. In turn, the customer can recover the VAT, subject to the normal rules.

These changes will become a legal requirement, so you should ensure your business is compliant from the start date.

Note: DRC applies exclusively to companies and individuals who’re registered for VAT in the UK (although it will not apply to consumers). 

2. How will this impact my business? 

DRC is being implemented in an effort to fight and reduce fraudulent behaviour. There are instances where companies have taken VAT that’s been paid to them by a customer (that’s then meant to go to HMRC), but been held on to as ‘profit’ that isn’t legally theirs to keep.  

Changes like this inevitably impact a business, whether it’s disrupting the status quo, creating additional admin, or meaning you have to update your policies (you may remember the GDPR and privacy updates from a few years ago, as an example). However, if you’re prepared, the impact will be minimal.

These changes will affect a variety of field service businesses and depend on the services you provide. An easy way to know if your business/service is affected is noting whether you’re registered to supply or receive services under the Construction Industry Scheme (CIS). There are exceptions, but you can check those listed on HMRC, and in our list below:

Domestic reverse charge

HMRC has acknowledged that the implementation will cause some difficulties. It’s even delayed the original launch date twice, to begin 1st March 2021, instead.

They also stated that for the first 6 months they’ll apply a light touch in dealing with any errors made […] as long as you are trying to comply with the new legislation and have acted in good faith”.

While you should continue do everything to prepare to be compliant (more on that below), you can rest a little easier knowing there’ll be a period of adjustment in place.

3. What should I do?

First and foremost, make sure all preparations are completed by the 1st March 2021

The actions you need to take will depend on the type of business you run and what sort of services you’re involved in offering. Different rules apply for Contractors, Sub-contractors, and companies who either are or aren’t listed under CIS. 

HMRC states the following when it comes to whether you’re a contractor or sub-contractor and what you need to do to be ready:

What contractors need to do:

If you’re a contractor you’ll also need to review all your contracts with sub-contractors, to decide if the reverse charge will apply to the services you receive under your contracts. You’ll need to notify your suppliers if it will.

What sub-contractors need to do:

If you’re a sub-contractor you’ll also need to contact your customers to get confirmation from them if the reverse charge will apply, including confirming if the customer is an end user or intermediary supplier.

Best Practices

Below, we’ve listed the four best practices to keep in mind when preparing for DRC:

Reverse VAT

4. Who should I talk to if I have more questions?

In short, HMRC and your accountant. 

Whichever way you manage your invoicing, payments, and VAT, definitely speak to the relevant people with the right financial expertise. They will know how to help you prepare.

Click here to read about Domestic Reverse Charge on HMRC. For the latest updates, be sure to check them over and bookmark the page for further updates, until the changes officially come in to effect.

In addition, you should also watch their Webinar. A visual aid is often more useful alongside written content alone. With over 1000 participants, the webinar is an informative online session and a great way to get up to speed, if you’re not already.

Speaking of visual aids, you can download our infographic on Domestic Reverse Charge VAT changes in the building and construction industry. Click below:

VAT reverse charge

The Takeaway

The impending changes are a legal requirement, so do all you can make sure you’re compliant and ready to go from the 1st March 2021

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