The Domestic reverse charge VAT legislation (DRC) is a change in the way CIS registered construction businesses handle and pay VAT and has been introduced in the UK from March 1st 2021.
It affects VAT registered construction businesses who supply or receive construction and building services that are reported under the Construction Industry Scheme (CIS). It means the customer (contractor) will be responsible for the VAT due to HMRC instead of the supplier (subcontractor).
When processing a subcontractors charge as a supplier invoice a new vat code needs to be created as shown below. By using this code the vat element will land in boxes 1 and 4, net affect being nil, and the net purchase amount will land in box 7.
How to create your new VAT Codes
To create your new VAT codes go to All settings > Finance > VAT Codes. Select the option New VAT Code. The entry box will appear and add the following:-
Type – Select Purchases
Rate Type – Select Domestic Reverse Charge
VAT Code – Enter an abbreviation of the code, for example P-DRC (you have 5 characters to play with)
Name – Enter the name of the code you are creating, for example, Purchases Domestic Reverse Charge.
Rate (%) – Enter 20.00
Account – Enter 2201 (this is the default sales vat code) and in Contra account enter 2202 (this is the default purchase vat code). If your chart of accounts are different to a standard default chart then enter the corresponding codes for your sales and purchase vat control accounts.
Access – This should reflect ‘Open’.
Click Save to complete the process.
You can also create another VAT code for Domestic Reduced Reverse Charge which is currently 5%. The differences being:
VAT Code – Enter an abbreviation of the code for example, P-RDR, Purchases Domestic Reduced Reverse Charge.
Rate (%) – Enter 5.00
To create sales invoices the process is very similar:
You can then create a new Product within your Product list, link to the new Product Group, this will automatically deal with your Domestic Reverse Charge VAT and place nil in the box 1 and the net amount in box 6 of your VAT return.
Type – Select Sales
Rate Type – Select Domestic Reverse Charge
VAT Code – Enter an abbreviation of the code, for example S-DRC (you have 5 characters to play with)
Name – Enter the name of the code you are creating, for example. Sales Domestic Reverse Charge.
Rate (%) – Enter 0.00
Account – Enter 2201 (this is the default sales vat code) and in Contra account enter 2201. If your chart of accounts are different to a standard default chart then enter the corresponding codes for your sales and purchase vat control accounts.
Access – This should reflect ‘Open’.
Click Save to complete the process.
Once the VAT code has been created you will need to create a Product group linked to the sales account within your chart of accounts which is then linked to the new vat code. You can then create a new Product within your Product list, link to the new Product Group, this will automatically deal with your Domestic Reverse Charge VAT and place nil in the box 1 and the net amount in box 6 of your VAT return.