The Construction Domestic Reverse Charge came into force on 1 March 2021. It was, therefore, important that your construction business was ready for the changes.
Get Your Construction Business Ready with Xero
Whether you were a subcontractor or a contractor, Xero handled the Domestic Reverse Charge (DRC) automatically, ensuring that the correct information appeared on your CIS sales invoices.
For CIS bills received, Xero recognised that you had to account for input and output VAT and processed this automatically, so the hard work was done for you.
Xero included:
- Four new taxes to help you comply with the DRC:
- 20% VAT on income.
- 5% on VAT income.
- 20% VAT expenses.
- 5% VAT on expenses.
- Automatic DRC calculations in your invoices, bills and credit notes.
- Automatic DRC updates on your Making Tax Digital Return.
Using Xero as a Subcontractor
If you were a subcontractor, you needed to ensure the DRC appeared on your invoices.
In Xero, you could use the ‘Domestic Reverse Charge on Income’ tax rates when raising invoices for construction services and related supplies.
Xero recognised that VAT should not be charged and informed your customer that they were required to account for VAT.
If you used Xero’s CIS feature, it automatically calculated the CIS your customer needed to withhold, managing this on your behalf.
Using Xero as a Contractor
If you were a contractor, you needed to ensure that the DRC was correctly shown on the bills received from subcontractors.
In Xero, you could use the ‘Domestic Reverse Charge on Expense’ tax rates when entering bills for construction services and related supplies.
Xero automatically recognised when the reverse charge applied and ensured the correct VAT was calculated.
If you used the CIS feature, Xero also calculated the amount of CIS to withhold.
Checklist
To be ready for the implementation date on 1 March 2021, you needed to ensure:
1. You and your staff understood the new Domestic Reverse Charge for building and construction services rules, including when they applied and when they didn’t. Further guidance was available on the HMRC website: HMRC Guidance – Construction Domestic Reverse Charge.
2. Your accounting software had been updated to deal with the DRC. Many turned to Xero for its built-in functionality. For advice, you could contact Mark Tooby, Outsourcing Manager.
3. You considered the impact of any cash flow changes. It was important to seek professional advice from your accountant.
4. You ensured that your CIS customers and/or suppliers were aware that the DRC would apply to sales and/or purchases of construction services.
For help or advice on how to prepare your business for the new rules, contact Lee Sugden or Mark Tooby on 0161 761 5231 or email theteam@horsfield-smith.co.uk.
