The new Domestic Reverse Charge (DRC) rules for the construction industry are due to commence on 1 March 2021.
A common mistake will be that a builder selling services doesn’t charge VAT when he should do, or a buyer pays VAT to a supplier when the reverse charge should apply. HMRC has the power to correct such anomalies in both cases by raising an assessment, so there is a big incentive to get the VAT treatment right the first time.
If a customer is incorrectly charged VAT by a builder when the reverse charge should apply, he must ask him for a VAT credit to correct the situation.
Domestic Reverse Charge – How to Verify Suppliers
A builder selling construction services must first be sure that his customer is both VAT and CIS registered.
It is recommended that the customer’s VAT number is checked by using HMRC’s new VAT number checker service. It might be worthwhile making this check an annual task, just in case the customer has deregistered during the year, perhaps due to reduced turnover.
A potential difficulty is when the customer is in the process of applying for a VAT number from HMRC. In this situation, you should consider the advice given in VAT Notice 735, para 9.3.2, which is to request a 20% advance deposit from the customer to cover the potential output tax liability if things go wrong.
The HMRC guidance advises:
Any deposit taken in these circumstances can be refunded when they can show evidence that they’ve got their VAT registration number.
Domestic Reverse Charge – How to Verify Customers
The challenge is to make sure that reasonable steps have been taken to check a customer is bona fide. A lot of this process comes down to common sense. If your client is doing business with a new customer, a due diligence process should have been carried out as part of the commercial decision to take on that customer.
HMRC has confirmed that a builder who has been deliberately misled by a customer but has taken reasonable steps to check their credibility will not be held responsible for underpaid output tax. The ‘reasonable steps’ issue is well-summarised by para 9.3.1 of VAT Notice 735.
Domestic Reverse Charge – Three Points to Remember
There are three priorities for those who are buying in building services from March 2021 onwards.
Incorrectly charged VAT
Make sure that you are not charged VAT by a builder when the reverse charge should apply. You can still claim input tax in Box 4 but HMRC has the power to assess output tax for the same amount, as if the reverse charge had been carried out correctly.
Nature of work
Check that the work comes within the scope of the CIS and that the supplier is providing building services, but is not an employment business which is only making a supply of staff rather than construction services. Supplies by an employment business are subject to normal VAT rules.
End user or intermediary supplier
The final check is for customers to advise their builders before work starts if they qualify as either an ‘end user’ or ‘intermediary supplier’ for any of the work in question, as explained in the article Domestic Reverse Charge for Building and Constructions Services.
Domestic Reverse Charge – Final Words
As with many issues in tax, advance planning is the key to reducing the risk of errors. Training of relevant staff will be very important. The aim of the new rules is to reduce the incidence of VAT fraud in the construction industry – don’t play into the hands of the fraudsters by having weak checking procedures.
Finally, if you do get things wrong, HMRC has confirmed in section 5 of its detailed guidance that it will adopt a light touch as far as penalties are concerned for errors made in the first six months of the new legislation, i.e. until 31 August 2021, as long as you are trying to comply with the new legislation and have acted in good faith.Domestic Reverse Charge, VAT