The Domestic Reverse VAT Charge for Building and Construction Services (DRC) came into effect on 1st March 2021.
The aim of the measure is to reduce VAT fraud in the construction sector. In brief, it represents a significant change to the way that VAT is collected within the construction industry, in that VAT-registered subcontractors supplying construction services to VAT-registered contractors will no longer charge VAT for services supplied. Instead, the main contractor will be responsible for paying the VAT over to HMRC on the subcontractor's behalf.
For the reverse charge to apply, the following is a summary of the key conditions that are to be met:
When supplying a service subject to the domestic reverse charge, subcontractors must issue an invoice which:
HMRC provide the following example:
Comprehensive HMRC guidance on the operation of the domestic reverse charge can be found here. We recommend fully familiarising yourself with this guidance if you are uncertain of whether the domestic reverse charge is to apply.
On receipt of a subcontractor invoice to which the domestic reverse charge applies, the contractor will not be required to enter any VAT amount through the CIS utility in BrightPay when processing the payment for the subcontractor.
The contractor will simply pay the subcontractor the amount due to them NET of any VAT and after any relevant CIS deduction has been taken into account.
The contractor is then responsible for recording the reverse charge on their VAT return to HMRC (click here for HMRC guidance on this).
To aid completion of the necessary entries subsequently required in your accounting software and in turn the associated VAT return, you may wish to utilise the notes section on the subcontractor's payment screen to indicate when the reverse charge applies, as per the following example:
A CIS report can then be generated within 'Analysis' to include the 'Notes' column:
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