CIS and the Domestic Reverse Charge
If your business supplies construction services, the VAT Domestic Reverse Charge (DRC) now affects how you process VAT. Originally planned to commence in October 2019, the DRC was finally applied on 1 March 2021, having been delayed by Brexit and the coronavirus pandemic. This blog post explains how it works and what it could mean for your construction business.
Domestic Reverse Charge in a nutshell
Put simply, the CIS Domestic Reverse Charge means that the customer has to account for the supplier’s output VAT. However, it only applies when a business is supplying construction services to another business, not when invoicing a homeowner.
Why does DRC exist?
The main purpose of the Domestic Reverse Charge is to prevent VAT fraud, which has historically been a problem within the construction industry.
Main points of DRC
Your business should apply the CIS Domestic Reverse Charge when all of the following conditions are met:
The supplier and the customer are both registered with CIS
The VAT is being charged on the supply of construction services and materials
The supply is made at the standard or reduced rate of VAT
The supply is made between a UK VAT registered supplier and a UK VAT registered customer
The customer plans to make an ongoing supply of construction services to another party
The supplier and customer are not connected (e.g. not part of the same group)
The supplier is not an employment business
The customer is not an end user (an end user is a customer who doesn’t intend to make ongoing purchases of construction services, such as a homeowner or house buyer)
Exemptions to DRC
As well as the above conditions, the DRC will not apply to the following:
Building and construction services that are exempt from VAT
Supplies that are not covered by CIS
The supply of staff/workers
The supply of materials only
In addition, DRC does not apply if your company is supplying to non-VAT registered customers.
The CIS Domestic Reverse Charge doesn’t apply to all forms of construction services. To be certain which types of activity are included or exempt, get in touch with the team here at TreyBridge Accountants for a chat.
An example of how DRC works
Let’s say there’s The Builder who supplies construction services to The Contractor. The Contractor then supplies these services to The Housing Developer, who sells completed homes to end users. All three parties are VAT registered.
Now that DRC is in effect, The Builder will invoice for his services without adding VAT to the bill. His invoice will clearly state that the CIS Domestic Reverse Charge applies and states the rate of VAT that needs adding. The Builder is then paid this net amount by The Contractor and he doesn’t need to account for output VAT in his accounting system.
As for The Contractor, they will charge the VAT if The Housing Developer is supplying to end users. This means that The Housing Developer must make it clear to the supply chain what the situation is at the very start.
The pros and cons of DRC
The above is just an example but it demonstrates how DRC affects all parties in the supply of construction services. If you’re the initial supplier, you may be pleased that VAT is taken out of the equation, as it might simplify your bookkeeping and tax processes.
However, it’s also worth bearing in mind that not charging VAT could affect your cash flow. You may be accustomed to using charged VAT to buy the materials required for each job, which then wouldn’t have to be paid to HMRC until the next quarter. That’s why it’s more important than ever to budget effectively and ensure that you have the funds available to purchase supplies before the construction project begins.
Ask us for more advice
We hope that’s cleared up the CIS Domestic Reverse Charge but we understand that you may want the process clarifying further. For dedicated advice and support, please call our Yorkshire office on 01482 235575, our London office on 0207 885 0605, or fill in the contact form below.
Tagged as: Tax & Expenses
Share this post: