How does the VAT domestic reverse charge work?

From 1 October 2019, VAT-registered businesses  supplying certain construction services to other VAT-registered business for onward sale, will not be required to account for VAT, but must issue an invoice stating that the service is subject to the domestic reverse charge. The recipient of the supply must account for the VAT due on the supply through its VAT return, instead of paying VAT to the supplier.

In essence, the VAT domestic reverse charge means the customer receiving specified construction services has to pay the VAT to HMRC instead of the supplier. In turn the customer can recover the VAT, subject to the normal rules for VAT recovery.

There is concern that affected construction SMEs, contractors and subcontractors are unaware of the need to apply the domestic reverse charge and so are unprepared for the necessary accounting changes and the cashflow impact. As a result, the Government is being pressured to delay the introduction of the charge, but at the time of writing, it is still due to come into effect from 1 October 2019.

Government guidance

The government has issued guidance on the VAT domestic reverse charge, including a simple flow chart to check if the charge applies to you.

Ready for the charge?

To prepare for the charge, HMRC recommends:

  • checking whether the reverse charge affects either your sales, purchases or both
  • making sure your accounting systems and software are updated to deal with the reverse charge
  • considering whether the change will have an impact on your cashflow
  • making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate

 

If you are unclear on the charge and whether or how it applies to you, do get in touch.