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Domestic Reverse Charge (DRC)
Are you a VAT-registered business in the UK construction industry? If so, Domestic Reverse Charge (DRC) is an important topic you need to be aware of! Don’t worry, we're here to help!
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What You Need to Know about Domestic Reverse Charge
Domestic Reverse Charge is a VAT mechanism introduced by HMRC to combat VAT fraud within the construction sector. It shifts the responsibility for paying VAT from the supplier to the customer in certain transactions, affecting how VAT is accounted for in the supply chain.
Under the Domestic Reverse Charge (DRC) rules, only services falling within the scope of CIS are affected. This implies that DRC is applicable to specific construction services, including building construction, painting, decorating, heating installation, and more.
Until March 2021
A subcontractor (builder) providing services and building materials to a contractor (construction firm) is required to include VAT charges and report the VAT to HMRC through their VAT return submission.
After March 2021
When a subcontractor (builder) provides services to a contractor (construction firm), the contractor is responsible for declaring the VAT due on their VAT return and reclaiming it as per the normal VAT rules.
Showing Domestic Reverse Charge in VAT Return
If you buy services subject to the reverse charge, you must handle the VAT accounting in the following manner:
Box 1: Enter the VAT charged on reverse charge purchases as output tax.
Box 4: If you are eligible to claim VAT on reverse charge purchases, enter the same amount in Box 4.
Suppliers who provide services under the reverse charge should not include any output VAT on sales in Box 1. Instead, they need to enter the net sales amount in Box 6 of the VAT return.
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