Nisha Patel takes a look at how to account for the proposed VAT domestic reverse charge and how the postponement may affect some subcontractors.
The VAT domestic reverse charge (DRC) has been delayed and is now set to come into effect on 1 October 2020.
Subcontractors supply businesses with workers where the main cost to them are the workers' wages, a cost not subject to VAT. When they invoice the business for the supply of construction services, they can charge VAT. Subcontractors, therefore, receive significantly more VAT compared to what they pay on their purchases. Fraud occurs if these subcontractors then disappear without paying over the VAT due to HMRC.
In this article, I take a look at how to account for the new VAT domestic reverse charge, and how the postponement may affect some contractors.
How to account for DRC
Customers who receive construction services and any associated goods will have to account for the VAT on their VAT return rather than the supplier. The customer can still recover the input VAT in the normal way subject to their own VAT position. This is known as the reverse charge.
For example, if a subcontractor invoices a customer for £100 plus VAT, the customer’s VAT return would be completed as below and he would pay the subcontractor £100 only.
|
VAT due on sales |
Box 1 |
£20 |
|
VAT on EC acquisition |
Box 2 |
|
|
Total VAT due |
Box 3 |
£20 |
|
VAT reclaimed on purchases and EC acquisition |
Box 4 |
£20 |
|
Net VAT to be paid or reclaimed |
Box 5 |
£0 |
|
Total value of net sales |
Box 6 |
|
|
Total value of net purchase |
Box 7 |
£100 |
|
EC sales |
Box 8 |
|
|
EC purchases |
Box 9 |
|
On the subcontractor’s (supplier’s) VAT return, they would need to enter £100 in box 6.
In other words, the customer will declare both the output VAT and the input VAT on their VAT return, giving a net cash position of zero, subject to any partial exemption. HMRC will, therefore, receive all the money due to them and the subcontractor will receive the net amount due to them.
Exceptions
The VAT DRC does not apply to all businesses. In the following instances, DRC does not apply and the customer can charge VAT as normal:
- The customer is not VAT and CIS registered;
- The customer is an end-user;
- The supplier makes zero-rated supplies of construction services;
- The supply is of goods only;
- The supply is of services overseas;
- The supply is of specified services where the supplier and customer are connected, such as supplies between landlords and tenants.
The effect of postponement
The introduction of a new VAT domestic reverse charge has been postponed by 12 months, to 1 October 2020. Industry and professional bodies have welcomed this delay especially as there may be difficulties at the beginning establishing who should pay VAT - the supplier or customer.
However, in the lead up to the original implementation day of 1 October 2019, some subcontractors may have already moved over to monthly VAT returns to take advantage of the cash flow benefit. Once DRC is implemented, subcontractors will no longer need to declare VAT on all their sales and may be due a repayment of VAT.
A delay in the implementation will mean subcontractors on monthly VAT returns may face unexpected VAT payments. In response, HMRC has said it will facilitate reversing their VAT returns to the original accounting dates.
Practical Tip
Businesses that have opted for monthly VAT returns can reverse this, by using the appropriate ‘stagger’ option on HMRC’s website.
