Initially planned to impact the construction industry on the 1st October 2019, the Domestic Reverse Charge legislation was proposed by HMRC to tackle fraudulent activity within the building and construction industries. Originally slated for 1st October 2020, the Domestic Reverse Charge will require all contractors, subcontractors, and construction businesses to report their activities to the CIS.
Though your business may have set an initial plan in motion to deal with the new legislation, the current climate’s effect on all industries has initiated the necessity for legislative delay. As a result on the 5th June 2020 the DRC has been officially delayed by 5 months and is now due to come into effect on 1st March 2021.
Whether your business has been affected by the coronavirus or you’ve been able to continue working to full capacity, it is important to be aware of the delay to the Domestic Reverse Charge so that your business can adapt and overcome during this difficult period.
What is the Domestic Reverse Charge?
The Domestic Reverse Charge refers to a new piece of legislation that has been released by the UK government regarding the building and construction industries. The charge applies to the whole service, whereas CIS payments to net status sub-contractors are apportioned and no deductions are to be made on the materials content.
This charge has come about due to the opportunity to commit VAT fraud within micro business
(usually smaller contractors and sub-contractors) who may avoid paying the VAT that they have collected.
Applying to building and construction services supplied at the standard or reduced rates that must also be reported under the scheme, the DRC also relates to the use of materials. It’s worth noting that the Domestic Reverse Charge will not apply to consumers or final consumers of building and construction businesses who do not make onward supplies of the building and construction services in question.
How will the DRC affect my business?
As some businesses may find that they no longer pay the VAT on some of their sales to HMRC, they will become repayment traders who can apply to move monthly returns to speed up payments due from HMRC. The best time to move these monthly returns will depend on the business and whether they wish to have monthly returns from March, or wish to delay this to offset some of the VAT that they owe to HMRC on periods spanning 1st March.
As this is a complex tax system, mistakes will likely be made in the first. To avoid any mishaps, it is best to know the DRC inside out and consult a reliable professional to make the process as seamless as possible.
Further delays and what they could mean for your business
The implementation of the Domestic Reverse Charge was initially planned to begin in October 2019. However, after industry lobbying and a lack of reasonable time to adjust current business practices, this was pushed back to October 2020. Given the current pandemic, organisers have looked to extend this for another year due to cashflow concerns, however the announced delay gives the industry only 5 additional months to prepare. There is, of course, a chance a further delay could be announced in 2021, but we would urge you to continue planning for the DRC to go ahead in March 2021 so that you are as prepared as possible.
As construction companies have been heavily effected due to the coronavirus response, it was becoming increasingly unlikely that the implementation of the charge could go ahead as planned. Up until the time that lockdown was placed on the UK, the construction industry was working alongside HMRC to prepare for this change to VAT. However, as companies were facing capacity issues on account of the global climate, the resulting cashflow issues have made continued work on the DRC difficult.
The concern that the Domestic Reverse Charge could reduce cashflow in the supply chain puts the survival of many companies at risk, so being fully aware of a potential change to its implementation date is crucial.
The call for the recent postponement of the Domestic Reverse Charge was instigated by the Federation of Mast Builders, and was signed by Build UK, the Builders Merchants Federation, the National Federation of Builders, and the Construction Products Association amongst others. Due to the level of lobbying from the industry and the lack of readiness within the sector thanks to the coronavirus the delay was agreed upon.
If we’re assessing facts and figures in regards to the implementation, just prior to the shutdown of the economy in many areas (February 2020) it was found that 39% of a surveyed group of 1,000 did not know about the impending introduction of the charge and 46% of respondents stated that their accountancy software was not yet programmed for the change.
I have changed my invoice methods already, what should I do?
Though some businesses have already changed their invoices to meet the needs of the reverse charge (which cannot be easily changed back), further delays to the implementation of the charge should be considered by businesses when creating and fulfilling invoices.
Businesses that have already opted to change to monthly returns due to the DRC may wish to return to quarterly returns. However, as compliance reporting requirements will have increased alongside the VAT payment frequency, if this is not changed back to quarterly returns in light of the current global situation, businesses may feel the effects of increased administration and experience a negative impact to cashflow. Therefore, delays should be duly considered and accounted for wherever possible.
In addition to this, for those businesses that have invested time and money to meet the original extension deadline of 1st October 2020, it may be frustrating and costly to prepare for the new delayed date of 1st March 2021. As previously mentioned, switching VAT return accounting dates as soon as possible will prove particularly pertinent during the coronavirus crisis, as contractors will already be facing alterations to current business models.
If you think the DRC will affect your business and you’re unsure on the best way to proceed you can consult our page about DRC here or contact us for a consultation if you’d like to take advantage of our professional services.
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