The combination of this, along with the learning curve that is affecting several businesses in the industry from the enforcement of Making Tax Digital has meant a hectic administrative time for construction businesses. It's important to remember that the best way to prepare for the new DRC rules is to be informed, know your responsibilities and contact your business advisor to clarify any concerns, as well as to set a plan in place.
Whenever there is a change, one of the first questions asked is, why? Like many recent changes announced this past year in the Budget 2018 and by HMRC, anti-fraud is a key factor. The implementation of the 'DRC' legislation has been seen as a way to prevent missing trader fraud in the construction sector.
In its simplest terms, the introduction of the ‘reverse charge’ means that the customer rather then the supplier will be liable to account for any VAT due on certain building services directly to HMRC.
These changes may prove quite the hurdle for VAT-registered businesses, as well as charities or voluntary based organisations delivering construction services.
The VAT Advice Line outlines the pending changes and notes that there will be a significant adjustment for both suppliers and customers, this includes:
Cash flow will be a dominating issue for subcontractors where they will no longer be charging VAT due to the DRC.
HMRC will require VAT payment before the VAT you collect from your customers can be used.
Will be required to issue a VAT invoice stating that the service is subject to the domestic reverse charge.
Ensure you’re charging the correct amount of VAT dependent on the work performed (20% | 5% | 0%).
If you are the ‘end user’, you must inform the supplier to ensure you charge the correct rate of VAT if required.
The HMRC guidance states that “it will be up to the end user to make the supplier aware that they are an end user and that VAT should be charged in the normal way instead of being reverse charged. This should be in a written form that is clearly understood and can be retained for future reference.”
Where there is a reverse charge element in a mix of supplies, the entire supply will be subject to DRC.
Undoubtedly, the introduction of the reverse charge will necessitate the need for businesses to modify their accounting systems, as well as take into account how their cash flow may be affected. Remember that your accounting systems need to be reverse charge and MTD compliant.
HMRC originally set a date of 1st October 2019 for a major change to take affect with the introduction of the new domestic reverse charge ('DRC') rule;however, on 6th September 2019 we saw a sudden, but perhaps not so surprising, announcement made by HMRC stating that the domestic reverse charge rules would be delayed to 1st October 2020 meaning the current rules are in affect until then.
It's not a shocking announcement as many businesses effected by the impending change argued that the awareness and timeframe given left them unprepared to implement the necessary requirements to remain compliant, which HMRC agreed.
Do not take this newly announced start date as an opportunity to set preparations aside and potentially forget about your soon-to-be obligations.
The content of this post is up to date and relevant as at 20/09/2019.
Content originally published 13/02/2019.
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