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Construction, Land and Property

Domestic Reverse Charge (DRC). Simple?


The DRC was implemented with effect from 1 March 2021. As with most anti-avoidance provisions, the impact is likely to be greater than anticipated, especially as HM Revenue & Customs seems to have taken the view that if there’s doubt you should apply DRC.

The DRC applies to ‘specified services’ where the recipient then makes an onward supply of those specified services. Specified services are generally services that are defined as construction operations for purposes of the Construction Industry Scheme (CIS).

So, one of the first effects was the need to drill down to establish what works are reportable under CIS. This has shown that there are a number of activities that with a slight “tweak” can fall out of CIS. For example, the transport of spoil within a site is within CIS but taking the same spoil off-site is not; so what if you have two separate sites and transport the spoil between the two rather than within each?

We also have an example of two sub-contractors providing the same service. Both have taken specialist advice (not from RL) and one has been told they are subject to DRC and the other that they are not.

In such a scenario, where’s the risk?

Well, under DRC the contractor takes on the responsibility of accounting for the VAT. Therefore the sub-contractor issues an invoice which shows that the VAT is not due and that the contract accounts for it under DRC. The contractor then declares output tax on the value of the supply (the “reverse” element of the description) and, on the basis that they are fully taxable, recovers the same amount as input tax on the same VAT return. This results in a “nil net effect” so that the contractor does not have to pay additional VAT under DRC (unless they cannot recover the VAT in full). However, if the supply is treated as “normal” the contractor pays the sub-contractor the VAT and again on the basis that the VAT is reclaimable, recovers the VAT as input tax on the relevant return. So here the risk is with the contractor as HMRC will assert that the contractor has reclaimed VAT it was not entitled to do and may assess the contractor for this “over-claimed” input tax.

And perhaps that’s the point. As the contractor is the payer they are seen as “holding the cards” in the relationship, and HMRC is looking to the contractors to act as unpaid DRC enforcers because the cost of getting it wrong is likely to be borne by them.

The other factor that shows that HMRC are effectively saying “if in doubt use DRC”, is the “disregard” threshold. This is where some elements of a supply fall within DRC and some do not. However, the threshold is that if the value of the DRC element is less than 5% of the whole value then it can be “disregarded”. A fairly low threshold which logic dictates can see up to 94% of non-DRC supplies being treated as subject to DRC.

A further complication is HMRC “clarification” of what is meant by “labour only supplies” not being subject to DRC, being restricted to supplies made by employment agencies of individuals under the direction of the site operator, rather than an individual arriving to work under their own supervision on providing a specific supply (plumbing, plastering, electricals, etc.) which are seen as a supply of the service (and so subject to DRC) rather than labour.

In the past the solution would have been to seek confirmation from HMRC as to the VAT treatment. Unfortunately, these days of low staffing levels, COVID, and what appears to be a distinct reluctance to inform the taxpayer, this option is rarely a viable one.

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