Introduction of the VAT domestic reverse charge for construction services in March 2021
24 February 2021| CATEGORIES: building and construction services, domestic reverse charge, VAT| TAGS: domestic reverse charge, new VAT rules
The VAT domestic reverse charge (DRC) for construction services is due to come into effect on 1 March 2021.
Background
The DRC is being introduced in a bid to tackle fraud in the construction industry. The measure removes the opportunity for fraudsters to set up construction companies, charge VAT to customers and then vanish before paying it over to HMRC. This is known as missing trader fraud.
Under this new taxation system, rather than the supplier charging and accounting for the VAT, it is the recipient of those supplies who will account for the VAT.
The measure was originally planned to be introduced in October 2019 but has twice been delayed – initially to allow businesses more time to prepare for the change, and subsequently due to the impact of COVID-19 on the construction industry.
Amendment to original legislation
Our June 2019 blog article provided details on the reverse charge rules. In 2020, HMRC announced that the original legislation laid in April 2019 would be amended to make it a requirement that for businesses to be excluded from the reverse charge because they are end users or intermediary suppliers, they must inform their sub-contractors in writing that they are end users or intermediary suppliers.
The change is designed to ensure that both parties are clear whether the supply is excluded from the reverse charge.
Impact on businesses
The DRC imposes a significant administrative burden on businesses affected by the change: it changes the way VAT is accounted for on the relevant services, which has an impact on both billing and accounting processes. In addition, there are cash flow consequences for businesses that supply services subject to the DRC.
Please get in touch if you are impacted by the new regulations and would like help preparing for this change.