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Domestic Reverse Charge (DRC)

From 1st March 2021, in the UK,  the Domestic VAT Reverse Charge (DRC) must be used for most supplies of building and construction services.

The charge applies to standard and reduced-rate VAT services:

  • for individuals or businesses who are registered for VAT in the UK
  • that are reported within the Construction Industry Scheme

Where this reverse charge is applicable, liability for the VAT payment on those items rests with your customer, rather than with you.  If you are unsure as to which areas of your business this applies to, please read the HMRC guidelines and the HMRC Technical Guide.

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Please note, Sage supports Domestic Reverse Charge on versions 26 and later. To use Domestic Reverse Charge you must be running one of these versions.

 

In order to help you easily deal with these changes, BigChange has developed the following solutions:

Enabling the Scheme

Enabling the Scheme

By use of the VAT Codes field, you can set up an automatic exchange of one VAT Code for another.

Specific tax codes have been set up for the purpose of DRC, however, the codes your organisation uses may differ slightly, so you should check with your financial adviser which are the correct codes for your business:

Sage – Sage has set up T21 for standard rate CIS and T26 for reduced rate CIS.  Where these codes are already in use the software will use the next available number.

Xero – The process for changes for Xero customers is explained in this Xero article.

Navigate: My account → Administration →[side menu] Financial→ VAT codes → [tab] → Profiles and tick the Domestic Reverse Charge checkbox. Then Save.

The following popup will now open:

This tax code will now be visible for selection when creating a VAT profile or when editing lines against contacts that have the profile enabled.

Set up Customer-Specific Profiles

Set up Customer-Specific Profiles

After setting up the scheme in Administration, we now move across to the CRM tab. In the CRM, you can create a VAT Profile for each contact you wish to apply a scheme to.  When a contact’s profile is set up, line items will automatically display the new tax code in place of the original one, for all eligible items, eg T1 > T21.

Step 1

Navigate: CRM → [side menu] Contacts → select contact → [tab] Financial  and use the  VAT subtab to set up a customer-specific VAT Profile.

Complete the popup form, including:

  • Ensure Domestic Reverse Charge is live.
  • Choose if you want this to apply to Child Contacts as well as the Parent Contact.
  • Complete the remaining mandatory fields in regards to the company’s tax information.
  • You also have the option to set a Review Date for your VAT Profile.

Example Step 1

Step 2

Next, press ‘Add tax code replacement‘ on the Profile. This is where you specify which Tax code needs replacing and the name of the new code. For example, T1 becomes T21 as this was the ‘rule’ we set up in the VAT Profile.  You will see that there is text explaining this.

Example Step 2

By default, all items will be regarded as eligible for DRC once the profile has been made live.  Non-eligible items, ie those to which DRC cannot be applied, can be added here by going to the relevant tab and then clicking ‘Add non-eligible item

Use your preferred method(s) to add any non-eligible items you would like, eg erecting signs or installing a security system

After you Click ‘Save’ you will see the new non-eligible item has now been added.

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If you would like to add any supportive documentation, this can be uploaded in the Attachments tab.

Line Item Behaviour

Line Item Behaviour

When you look at the Financials tab in CRM of a contact with a live DRC profile, you will see that it displays the information in an orange banner across the top of the screen:

There are now 4 scenarios demonstrating Line Item behaviour and for our example, we will use the codes T1 and T21:

  1.  No VAT Profile has been set up against the contact – In this example, there is no change to existing functionality, eg if the current tax code is T1, then it will remain T1.
  2. The VAT Profile has been applied but all line items are non-eligible – In this scenario, although there is an active VAT profile, since all items are non-eligible, the tax code displayed will remain as T1.
  3. The VAT Profile applies and there is a mixture of eligible and non-eligible items – Potentially the most confusing scenario, the rule is simple, where there is a mixture of eligible and non-eligible line items within a single invoice, the new Tax Codes will be used for all of them ie, all will display T21.  The exception to this is when the eligible items amount to less than 5% of the total.  In these cases, the original tax code will be used for all of them ie T1.  For more information on the 5% disregard clause, see below.
  4. The VAT Profile applies and all line items are eligible – As you would expect, all line items in this instance will display T21.

Where a VAT Profile is active and the DRC applies, you will see a DRC field beneath the totals, listing the amount of DRC which your customer must pay.

Templates & Invoicing

Templates & Invoicing

For invoices issued under DRC, the amount of tax that is to be paid by the customer must be included along with HMRC approved wording.

Our standard financial documents will include this, however, if you prefer to use your own templates, new keywords have been added to support this.

Navigate: My account → Administration → [quick links menu] Templates [tab] → Financial → [section ] Financial there is a new Keyword, ‘VAT profile text‘. The text added will differ depending on the scheme applied.  For Domestic Reverse Charge it will be:  ‘Customer to pay the VAT to HMRC: {Deduction Amount}’:

No text will appear where all items are exempt or where no profile has been applied to this customer.

Additional Keywords can be found in

Navigate: My account → Administration → [quick links menu] Templates → [tab] [section ] Contacts & notes . There are new Keywords, VAT Registration Number, UTR, Organisation Type & VAT Profile

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Unfortunately, BigChange cannot advise you on whether you need to apply DRC or which items are non-eligible. For guidance on this, please seek independent, specialist advice from a Financial Advisor or Tax Accountant.

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Updated on 12th April 2021

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