DRC for trade companies made easy
Domestic Reverse Charge (DRC)
You probably haven’t yet heard that much about DRC but if you’re VAT registered and in the construction/trade industry it’s a new set of rules about how you handle VAT between contractors and subcontractors that are both VAT registered.
On this web site we explain DRC in full. We answer the top questions with a pithy answer, then give more detail below once you know the key facts.
Fraud
HMRC’s objective is to prevent fraud, which can happen as follows.
A subcontractor who is not VAT registered invoices a contractor with VAT included. The contractor doesn’t mind because they can reclaim the VAT. The subcontractor doesn’t pay the money to HMRC. The result is that the subbie is 20% up and HMRC is 20% down. HMRC doesn't like that.
Example of DRC
DRC stops this by making sure that the subbie doesn’t get the VAT whether or not they are VAT registered, thus removing the temptation.
This is how it works before 1/3/2021 when everyone follows the rules:
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VAT registered Subbie invoices contractor for, say, £1,000 + VAT = £1,200
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VAT registered Contractor records supplier invoice for £1,000 + VAT = £1,200
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Contractor pays subbie £1,200
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Subbie (if following the rules), adds £200 to Box 1 and £1,000 to Box 6. They will pay HMRC £200 as a result
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Contractor adds £200 to Box 4 and £1,000 to Box 7. They will claim £200 from HMRC as a result
How it will work from 1/3/2021:
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VAT registered Subbie invoices contractor for, say, £1,000 with Reverse Charge VAT marked = £1,000 due
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VAT registered Contractor records supplier invoice for £1,000 with Reverse Charge VAT marked = £1,000
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Contractor pays subbie £1,000
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Subbie adds £1,000 to Box 6. They will pay nothing to HMRC as a result
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Contractor adds £1,000 * VAT rate (normally 20%) i.e. £200 to Boxes 1 and 4 and £1,000 to Box 7. They will claim nothing from HMRC as a result
Who does this impact?
DRC applies to the construction and trade industry. So, on this site we focus on the impact on Plumbers, Gas Engineers, Electricians, Builders and other small and mobile businesses. We also explain about how software can help.
Please go ahead and look at the frequently asked questions (FAQ) below.
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How does Powered Now work with DRC?
Powered Now fully supports Domestic Reverse Charge.