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New VAT Domestic Reverse Charge (DRC) for the Construction Industry

Posted 19/08/2019 by Genie Zhang

From 1st October 2019 a new VAT Domestic Reverse Charge (DRC) in the construction industry will take effect.

The new VAT Domestic Reverse Charge works in a similar way to the CIS scheme which means that the contractor (the one making payment for construction services) will become responsible for accounting and paying VAT to HMRC.

The sub-contractor (supplier) is still required to issue a valid VAT invoice, however the sub-contractor must not include VAT in the amount receivable from the contractor. Instead, the sub-contractor states on its invoice that the VAT DRC applies, and the contractor is required to account for the VAT to HMRC.

Who will be affected?

The VAT reverse charge will apply only to construction operations that need to be reported under CIS. These are considered to include: construction, alteration, repair, extension, demolition and dismantling; installing heating, lighting air-conditioning, ventilation, power supply, water supply; painting and decorating.

Some are not construction operations: professional services of architects or surveyors; installation of seating, blinds, shutters, security systems; minor repair of systems i.e. fixing a leaking tap; carpet fitting; installation of signboard.

Sales to end-users will be outside of the scope of reverse charge. End-users will be the recipients who use the construction services or building for themselves. i.e. a supermarket, property investment company and landlord.

Organisations will not be required to operate DRC on exempt or Zero-rate supplies.

How does VAT invoice and return change?

Contractor (customer): accounts for the VAT in box 1 of its’ VAT return and also recovers it on the same return in box 4. Accounts for net purchase in box 7.

Sub-contractor (supplier): needs to obtain confirmation from contractor that the reverse charge applies; issue a valid VAT invoice, clearly showing how much VAT is payable under the reverse charge on the supply (such as VAT amount or VAT rate); state VAT DRC applies and the contractor is responsible to account for VAT; Must NOT account VAT subject to reverse charge in box 1, but must account for net sales in box 6.

A simple example:

Farnell Clarke (end user) contracts with Building Ltd to construct a new office building. Building Ltd engages Floor Ltd (VAT & CIS registered) to undertake the fitting of vinyl flooring in the new office. The agreed cost of the work between Building Ltd and Floor Ltd is £30K, including £5K material cost.

Farnell Clarke - End User

Building Ltd - Contractor, Customer

Floor Ltd - Sub-contractor

Building Ltd is required to operate the new VAT reverse charge. Floor Ltd will not actually charge VAT to Building Ltd for payment.

Building Ltd will declare the VAT as output tax in box 1 £6k (£30K @20%), input tax in box 4 £6k, net purchase in box 7 £30k.

Building Ltd will withhold £5K (£30k-£5k @ 20%) for CIS payment.

Floor Ltd will put net sales £30k in box 6.

Building Ltd will charge standard rated VAT to Farnell Clarke which is an end-user.

Patrick Crookes & Jimmy Davies; <Spotlight on construction>; TAXAdviser June 2019
Tim Palmer; <VAT reverse charge for construction services>; TAXATION issue 4707

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