Domestic Reverse Charge VAT for the Construction Industry

As if we didn’t have enough to work through at the moment, here’s more changes for the Construction Industry, coming into force 1 March 2021


1. What’s it all about?

  • On 1 March 2021 there are new domestic reverse charge (DRC) rules coming into force for the construction industry.
  • The aim is to reduce fraud in this industry, and recover missing VAT.
  • More info from HMRC here.

2. Who does it apply to?

  • It only applies if you’re operating in the construction industry in the UK and contracting with other VAT registered businesses.
  • If you only provide building/construction services to non-VAT registered businesses, or domestic users or home owners, you don’t have to do anything.
  • There’s also no change if you’re providing your construction services overseas.
  • It applies to both services and materials where these are provided together.

3. What are the changes?

From 1 March 2021 if you’re operating under the Construction Industry  Scheme and VAT registered, this does affect you:

* If you’re a VAT registered subcontractor, supplying to a VAT registered customer, who is a registered CIS contractor:

    • You no longer charge VAT to your construction customer.
    • Your invoice should explain that:
      • the VAT reverse charge has been applied, and
      • they are responsible for reporting the VAT.

* If you’re a VAT registered contractor, operating under the CIS scheme

    • You will account for the reverse charge VAT on the purchase and sale on your VAT return.

4.  How do I know whether the DRC applies?

As the subcontractor, invoicing your contractor, it’s up to you to find out:

  • Whether your contractor is VAT registered:
    • ask for their VAT number, and verify their VAT number with HMRC here.
  • Whether your contractor is CIS registered:
    • ask for their CIS number and verify them here with HMRC
  • HMRC flowchart if you’re a subcontractor (supplier)
  • HMRC flowchart if you’re a contractor (customer)

5. What do I need to show on my invoices

Your invoicing will look a little different if you’re providing services under the domestic reverse charge:
  • The invoice must:
    • show all the information normally required on a VAT invoice
    • make a note on the invoice to make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT
    • clearly state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown
      • the VAT should not be included in the amount charged to the customer
    • Here’s an example of an invoice issued under the new DRC rules
    • Xero is already set up for the new VAT rates, and there is more info here.
    • By using these specific domestic reverse charge VAT rates, the correct information will appear on your sales invoice

That sounds confusing!

If you need help understanding the new rules, and getting set up in Xero, give us a shout! We’re always here to help.