6 June 2020
HMRC is introducing the Domestic Reverse Charge (DRC) to come into force on 1 March 2021. Initially due to begin on 1 October 2019, HMRC postponed the implementation of the reverse charge to 1 October 2020 to give businesses in the construction sector more time to prepare and avoid any changes coinciding with Brexit. However, due to the Coronavirus pandemic, the DRC will now come into effect on 1 March 2021.
If you work within the construction sector, here’s what you need to know:
What is the Domestic Reverse Charge?
The Domestic Reverse Charge will change the way VAT is paid on construction and building invoices. It’s a major revision to the system, establishing itself as another tactic to combat fraud in the construction sector.
It means that, from March 2021, customers receiving a service from an eligible construction or building company will have to pay the VAT due to HMRC rather than paying the supplier.
Who does the Domestic Reverse Charge apply to?
The DRC will apply to VAT registered individuals or businesses who supply or receive specified services under the Construction Industry Scheme (CIS). It also applies to goods supplied within specified services. See the list of services affected and excluded here.
What is the penalty for non-compliance?
According to HMRC, they will “apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.”
Some businesses would have already made changes to their invoices to comply with the new rules as the delay on DRC was announced just under a month before it was due to launch on 1 October 2019. As of June 2020, another delay was announced, so, if errors are made, HMRC has confirmed that the delay in implementation will be taken into consideration with regards to consequences.
Affected businesses have more time to start preparing for the new charge. HMRC suggest preparing for the 1 March 2021 introduction date by:
- checking whether the reverse charge affects either your sales, purchases or both
- making sure your accounting systems and software are updated to deal with the reverse charge
- considering whether the change will have an impact on your cashflow
- making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate.