Colin Laidlaw CTA AIIT
- VAT Tax Director - Technical Specialist
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View all peoplePublished by Colin Laidlaw on 20 May 2021
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After some delays the new rules on the domestic reverse charge for construction (DRC) finally came into effect on 1 March 2021. Hopefully most affected business will have experienced it in one form or another but we have seen many queries from clients on the practical aspects of this and this article serves as a useful reminder of the mechanics of the scheme.
This change has been introduced to counter fraud in the construction industry and effectively removes the charge to VAT for contractors in the chain of supply.
In simple terms the onus to report the VAT rests with the contractors rather than the sub contractors earlier on in the supply chain.
In a simple supply chain the position is as follows:
From 1 March 2021 this would change to:
In this scenario the Contractor treats the supply from the sub-contractor as if it was supplied by itself and charges itself VAT (at the standard rate – 20%). Assuming VAT is charged on to the End user, this VAT is recoverable in the normal way.
This reverse charge prevents the sub-contractor from charging VAT and not paying to HMRC.
This is all well and good in theory but we have seen the following issues when putting it into practice:
This is a bit of mindset change in the way VAT operates for a large sector and is still a relatively new change and it is not clear what approach HMRC will take to non-compliance or errors in the application of it in the early stages. They have said that a light touch will be applied but time will tell. Given that this is an anti-fraud measure we can expect HMRC to review it as part of its assurance program.
There may well be variations to the scheme as it progresses and HMRC experience it in operation and/ or receive representation from affected bodies.
If you need any assistance in administering the changes please do talk to one of our VAT specialists.
Talk to your local VAT specialist if you need assistance or call, or email, our specialist VAT team.
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