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What is the Domestic Reverse Charge (DRC)?

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Carol Hallam - Menzies Accountant

Carol Hallam – VAT Specialist

The DRC is a major change to the way VAT is collected in the building and construction industry.  Under the DRC rules VAT and CIS registered customers receiving certain construction services will have to self-account for the VAT due and pay the VAT to HMRC instead of paying the supplier. 

HMRC have announced that the DRC which was due to come in on 1st October 2020 will be delayed until 1st March 2021.

For more details based on current HMRC guidance, please refer to our article

Why was the DRC postponed? 

origami question

Concerns were raised by the construction industry and professional tax bodies about the readiness to apply the new rules by the affected businesses due to the lack of awareness and therefore preparation.  The detailed HMRC guidance was released less than 4 months before the original implementation date.  A survey carried out in the summer by the Federation of Master Builders found 69% of construction SMEs had not heard of the DRC, which was similar to the Chartered Institute of Taxation’s findings.

HMRC have announced that the DRC which was due to come in on 1st October 2020 will be delayed until 1st March 2021. 

Preparation for DRC 

HMRC has acknowledged the issues with the communication and guidance and has taken the following steps to work with the taxpayers, industry and accountants:

HMRC will have a dedicated information campaign which will include:

  • Targeted direct mailing to businesses, on both HMRC’s VAT and CIS systems, who may be affected by the DRC.  The letters are expected to be sent out in January 2020. 
  • Access to a webinar about what subcontractors need to do under the DRC. 

HMRC is working with the construction industry to prepare FAQs and to provide further guidance on grey areas identified.  Clarification sought by the construction industry relate to the following: 

  • Considering the indicators to identify labour only subcontractors where CIS registered labour only subcontractors fall within DRC if certain conditions are met but labour agencies are outside the scope of DRC. 
  • Supplies of installation and maintenance services with material where part of the supply falls within DRC and part falls outside the scope of DRC. 
  • Supplies of goods not ordinarily incorporated and related installation. 
  • Scaffolding and the effect on DRC of a consolidated invoice compared to an invoice with split charges for the hire, erection and dismantling of scaffolding. 
  • Plant hire with operator and when the supply falls outside of DRC. 
  • Design and build contracts and the effect of DRC. 
  • Snagging. 
  • Retentions.

More guidance will be issued by HMRC in the coming months.  In the meantime businesses affected by the new DRC rules should start preparing now.  If you would like to discuss how the new rules will affect your business, speak to your usual Menzies contact or contact our VAT team. 

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