The Domestic Reverse Charge of VAT is a scheme introduced by HMRC (commencing date 01/10/2020) for any company or individual that is VAT registered and works under the Construction Industry Scheme (CIS) providing construction, paining, & decorating services may be subject to the Domestic Reverse Charge.
HMRC states it is aware of the large scale fraud that has occurred within the industry, whereby construction businesses charge VAT for their services but then disappear without paying their VAT bill, taking with them the 5% or 20% as additional profit. They have also managed to under cut their prices against many businesses working legitimately with the knowledge that they will have this additional ‘profit’. Therefore, by moving the VAT charge down the supply chain, HMRC intends to make this kind of fraud impossible.
The idea is that the sub contractors in the middle will pass on the VAT liability to the end user, so to the contractor at the end of the supply chain. This means that the sub contractor’s cash flow will decrease as it will no longer receive the VAT on it’s invoices but obviously does not then have a VAT liability for the jobs that meets the domestic reverse charge criteria. If you are effected by the domestic reverse charge it may be beneficial for you to go on a monthly VAT scheme where you can ease you cash flow strains by reclaiming VAT on purchases. It will probably no longer be beneficial for you to be on a flat rate scheme either.