In simple terms what this means is that instead of contractors charging VAT on their supplies and accounting for the VAT on their VAT returns as they do currently, they will be required to raise an invoice for the net value of the services and their customer will account for VAT on their VAT return as both output tax and input tax. This arrangement is designed to remove VAT from the supply chain to counteract missing trader fraud.
The DRC will apply when:
The supply consists of construction services and materials.
It is made at a standard or reduced rate of VAT. (It does not apply to zero-rated supplies.)
The supply must be between a UK VAT registered supplier and UK VAT registered customer.
Both the supplier and customer are registered for CIS.
The customer intends to make an ongoing supply of construction services to another party.
The supplier and customer are not connected.
The DRC does not apply to:
Supplies that are not covered by the CIS, unless linked to such a supply.
Supplies of staff or workers.
In addition, it does not apply to taxable supplies made to:
non-VAT registered customers.
'End Users' ie a VAT registered customer who is not intending to make further on-going supplies of construction.
'Intermediary suppliers' who are connected eg a landlord and his tenant or two companies in the same group.
HMRC’s guidance can be found at:
The DRC may require construction businesses to change their accounting systems to incorporate the changes. It will also require changes to invoices.
Businesses which rely on VAT collected from customers as working capital may be adversely affected once VAT is removed from the supply chain.
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