What is the Domestic Reverse Charge DRC?

Now that we have passed 1 March 2021, some of those working in the UK’s construction industry will have to handle and pay VAT in a different way.

You may not have heard about DRC but if you’re VAT registered and in the construction/trade industry it’s the rules about how you handle VAT between contractors and subcontractors. This only applies when the work done is subject to CIS (Construction Industry Scheme) and both parties are VAT registered.

The rules don't apply when a Builders Merchant is supplying a trade company.

Fraud

HMRC’s objective is to prevent fraud, which can happen as follows.

A subcontractor who is not VAT registered invoices a contractor with VAT included. The contractor doesn’t mind because they can reclaim the VAT. The subcontractor doesn’t pay the money to HMRC. The result is that the subbie is 20% up and HMRC is 20% down. A variant of this is where the subcontractor is VAT registered but then winds up the company or disappears without paying the VAT to HMRC. The result being the same.

Example of DRC

DRC stops this by making sure that the subbie doesn’t get the VAT whether or not they are VAT registered, thus removing the temptation.

This is how it works before 1/3/2021:

• Subbie invoices contractor for, say, £1,000 + VAT = £1,200

• Contractor records supplier invoice for £1,000 + VAT = £1,200

• Contractor pays subbie £1,200

• Subbie (if following the rules), adds £200 to Box 1 and £1,000 to Box 6. They will pay HMRC £200 as a result

• Contractor adds £200 to Box 4 and £1,000 to Box 7. They will claim £200 from HMRC as a result

How it now works (after 1/3/2021):

• Subbie invoices contractor for, say, £1,000 with Reverse Charge marked = £1,000

• Contractor records supplier invoice for £1,000 with Reverse Charge marked = £1,000

• Contractor pays subbie £1,000

• Subbie adds £1,000 to Box 6. They will pay nothing to HMRC as a result

• Contractor adds £1,000 * standard rate (20%) i.e. £200 to Boxes 1 and 4 and £1,000 to Box 7. They will claim nothing from HMRC as a result

Note that a builder buying materials from a construction company SHOULD be charged VAT on his purchase invoice as the reverse charge applies to materials supplied by a builder as part of his work but NOT to materials bought on a stand-alone basis without services.

Who does DRC impact?

DRC only applies to the construction and trade industry. So, we are focussing on the impact on Plumbers, Gas Engineers, Electricians, Builders and other small and mobile businesses. 

This article is brought to you by Powered Now. Our easy-to-use and powerful app runs on iPhones, iPads, Android smartphones and tablets, Macs and PCs. Using Powered Now you can be easily DRC compliant.

How does Powered Now work with DRC?

Powered Now fully supports Domestic Reverse Charge. When a sales invoice is being raised or a supplier invoice is being created, simply choose the appropriate "Reverse Charge" tax rate in the Tax Settings for every line on sales and supplier invoices that are subject to DRC. The result is that DRC is correctly handled by Powered Now.

If you use Powered Now with the Xero interface, contact Powered Now for advice on how to configure DRC with Xero.

Get ready with Powered Now

Powered Now Professional Plan includes:

• Everything in business
• Complex contacts, support for landlords, housing associations, sites
• Forms and Certificates
• VAT Returns, direct to HMRC through Making Tax Digital (MTD)
• Add your team, live tracking and chat
• Flexible inbuilt catalogue
• XERO Integration