Benjamin Dyer is the CEO of Powered Now. Powered Now aims to take the pain out of admin and paperwork for trade businesses like gas engineers, electricians, builders, and many more.
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Domestic Reverse Charge – the latest VAT change
There are only a few weeks to go until the latest VAT change and it’s not MTD. Benjamin Dyer of Powered Now looks at what further hassle is coming down the road.
MOST people have now heard of MTD (Making Tax Digital) for VAT. With around 300,000 new businesses due to fi le their fi rst MTD for VAT returns in each of August, September and October, MTD is far from over.
It’s therefore fairly incredible that a further change, known as the Domestic Reverse Charge (DRC), is due on 1 October. This is just six days before the fi nal batch of fi rst MTD fi lings!
The Domestic Reverse Charge The new change involves trade companies that use or act as subcontractors. It’s somewhat confusingly named the "Domestic Reverse Charge”, although actually if all you do is straight domestic work, it won’t apply to you. It’s called the Domestic Reverse Charge because there is already a reverse charge for EU sales and purchases.
If you are not currently subject to the Construction Industry Scheme (CIS) as a contractor or subbie then you will probably dodge this bullet. But if both you and your customer or subbie are both VAT registered and deal with CIS, you will be
caught from 1 October. If your VAT return is also due on 7 October there will be two changes just six days apart. You couldn’t make this stuff up.
This new “Domestic Reverse Charge” hopes to reduce VAT fraud. When a purchase is made between trade companies that would be subject to CIS, the purchaser pays the VAT to HMRC instead of to the subbie.
In practise this means that the subbie does not charge VAT on their invoice and therefore does not report or pay any VAT to HMRC on these sales. The contractor adds VAT at 20% on the purchase to their liability in their VAT return, while still claiming it back as though they had paid it to the subcontractor.
HMRC advice Detailed HMRC guidance can be found at
www.gov.uk by searching for “VAT domestic reverse charge” which will pick up the latest advice (at time of printing) published 7 June 2019.
DRC applies to both VAT registered individuals and businesses. Where one party is not VAT registered or the supply is zero-rated it will not apply. Nor does it apply to sales to an end customer.
The HMRC guidance helps to answer several diff erent questions: • How to decide if a customer is an end user or “intermediary” neither of which
is subject to DRC;
• How to check if your customer and/or supplier is CIS and VAT registered;
• How your VAT return will change; • What to do for contracts that span 1 October 2019, the date when this change is introduced.
Checklist Actions required by your business are: • Check if you are hit – as a contractor or subbie;
• Tell your customers and subbies; • Make sure any system that you use handles DRC; and
• Think about cash fl ow. Subbies may fi nd they have less cash in the bank after the change.
The bottom line To make this further change to handling VAT between contractors and subcontractors in the same timescale as the introduction of MTD for VAT seems crazy. But such is life.
The detailed guidance has only been published a handful of months ahead of the change. This makes things especially tricky. It all costs time and money for hard-pressed trade businesses and makes paperwork even harder to handle.
So, my final thought is to hope that this latest change is not just one too far for your sanity. Good luck!
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