You may have heard of VAT domestic reverse charge (DRC) for the construction industry, which is new legislation currently due to come into effect in the UK on 1 March 2021, having previously been delayed from 2019 and then October 2020 by HMRC.
We’re pleased to say DRC has been live in Xero for some time, so we’re ready to help you through the changes.
What is the VAT domestic reverse charge?
The VAT domestic reverse charge is a new way of accounting for VAT in the construction industry. It applies to VAT registered construction businesses and is an anti-fraud measure designed to counter sophisticated criminal attacks on the UK VAT system. It intends to cut down on “missing trader” fraud, where companies receive high net amounts of VAT from their customers but have no intention of paying the VAT to HMRC.
It doesn’t apply for services supplied to non-VAT registered individuals or businesses, which means work done for homeowners/domestic users should be invoiced in the usual way.
It also doesn’t apply to work done overseas. It only applies to UK companies providing building and construction services in the UK.
What does it mean for you?
If your business is part of the Construction Industry Scheme then you will be affected by the legislation, so it’s important you know how it will affect your business and processes as DRC will be a mandatory requirement from HMRC.
If you are a VAT registered subcontractor (supplier) who provides building and construction services to a VAT-registered contractor (customer) who is CIS-registered then you no longer need to account for the VAT. Instead, your invoice should inform your customer that the VAT reverse charge is applied and they are responsible for the VAT using the reverse charge procedure.
If you are a VAT-registered contractor (customer) you will instead account for both input and output tax on invoices you receive from your VAT-registered subcontractors.
- To find out more about how the DRC works in Xero read our Xero Central guide.
- To see a live Xero demo, join our CIS and domestic reverse charge webinar.
- For more information on the DRC for the building and construction industry read HMRC’s notice or watch their webinars.
- If you’re not yet a customer, you can sign up for a free trial and see how the VAT domestic reverse charge works in Xero.
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