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HMRC applies brakes to domestic reverse charge

HMRC has announced a one-year delay to the introduction of the VAT domestic reverse charge (DRC) for building and construction services. The DRC was set to come into effect on 1 October 2019. It has now been pushed back 12 months to 1 October 2020, due to fears that businesses in the construction sector are not yet ready.

The DRC does not change the VAT liability: it changes the way that VAT is accounted for. In future the recipient of the services, rather than the supplier, will account for VAT on specified building and construction services. 

This major change entails adaptation to invoicing and accounting systems, and a negative impact on cashflow for suppliers.

The DRC is a business-to-business charge, applying to VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). It will be used through the CIS supply chain, up to the point where the recipient is no longer a business making supplies of specified construction services. The rules refer to this recipient as the ‘end user’.

Broadly, the DRC means that a contractor receiving a supply of specified construction services has to account for the output VAT due – rather than the subcontractor supplying the services. The contractor will then be able to deduct the VAT due on the supply as input VAT, subject to the normal rules. In most cases, no net tax on the transaction will be payable to HMRC. 

Overall, the change may mean that the construction sector is likely to be subject to considerable HMRC scrutiny in the foreseeable future. Under the rules, for example, some subcontractors, with VAT to reclaim on inputs but no VAT to charge on outputs, will regularly receive VAT refunds. A regular repayment position could trigger a VAT inspection.

The government cites concern that some businesses are not yet ready to implement the change – and possible coincidence with Brexit – as the reasons for the delay.

Where businesses have changed their invoicing to be DRC-compliant and cannot reverse this in time, HMRC will take the change in implementation date into account should genuine errors occur. Businesses which have now adopted a monthly VAT return cycle, in order to mitigate any cashflow disadvantage, can change back to quarterly reporting during the interim if they prefer. 

If you would like assistance, please do contact us. Despite the delay, the government is still committed to the DRC, and businesses which have not yet assessed how they need to comply should still do so.