Domestic Reverse Charge VAT (UK only)
Domestic Reverse Charge (DRC) is a new way of accounting for VAT. From 1st March 2021 DRC applies to all VAT registered construction businesses in the UK. Put simply, the legislation moves the VAT liability from the supplier (subcontractor) of a service in the construction industry to the customer (contractor).
The legislation has been introduced as an anti-fraud measure designed to counter sophisticated criminal attacks on the UK VAT system. It intends to cut down on “missing trader” fraud, where companies receive high net amounts of VAT from their customers but have no intention of paying the VAT to Her Majesty's Revenue and Customs.
Requirements for dealing with the DRC
When the DRC applies to an item on their invoice, the supplier:
- Must make it clear on the invoice that the DRC applies and that the customer is required to account for the VAT.
- Must clearly state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown.
- Must not include VAT in the amount charged to the customer.
Send your quotes and invoices from WorkflowMax
In order to produce quotes and invoices that show the DRC, follow these steps:
Get started by checking the tax settings and enabling the DRC option in your account settings. This only needs to be done once for each account. The DRC option is available only in UK-based accounts.
To verify the tax settings and enable the DRC:
- In the Business menu, select Settings > Organisation Settings.
- In the Financial section and make sure that:
- Tax 1 Name is set to VAT and Tax 1 Rate is set to 20.
- If you want to use the 5% DRC rate, set Tax 2 Name to VAT 5 (or a name of your choice) and set the Tax Rate 2 to 5.
The above two names and rates will be used for clients who do not have DRC VAT enabled. For clients with DRC VAT enabled, there are two additional tax names and rates that you can use to apply the DRC to individual cost items and tasks:
- Domestic Reverse Charge @ 20% (20%)
- Domestic Reverse Charge @ 5% (5%)
These are visible in the Tax 1 Name and Tax 2 Name drop-down lists, available when setting up costs and tasks in quotes and invoices.
- Select Enable DRC Tax Rates.
- Save this change. You're now ready to apply DRC VAT at the 20% and 5% tax rate for selected clients.
Once the DRC is set up in your account, you need to enable the DRC option for the clients you want it to apply to. You can do this when you create a new client or by editing existing ones.
To enable the DRC option for an existing client:
- In the main menu, select Clients.
- Drill down on the name of the client you wish to edit. Client details are displayed.
Select Options > Edit. The Edit Client dialog is displayed.
- Click the Billing heading, to drop down the billing options.
- Select DRC applies to client and click Save. The DRC applies to client option now has the value Yes. To remind you that the DRC applies, this is also shown on the quote and invoice when you’re creating new documents.
- If you wish to enable the DRC for other clients, repeat these instructions from Step 1.
- Once you enable the DRC option for a client, all quotes and invoices you create for them will show the DRC rate applicable to each cost item and task.
- The DRC rate will be visible in the Tax drop down fields on the quote or invoice, and also when you edit each cost item or task.
- The applicable tax rate will be displayed, but the tax amount will not be included in the quote or invoice totals.
When you create a quote or invoice for a client who has DRC enabled, the quote or invoice detail screen will confirm that DRC is enabled for that client:
In the Billing section for tasks or costs on the quote or invoice, the tax rate drop-downs will also include the DRC rates.
You need to ensure that the appropriate DRC rate is applied to each cost item or task when you add either to a quote or invoice:
- To apply the 20% DRC rate: do nothing, as the default value for
- Tax 1 is Domestic Reverse Charge @ 20% (20%), and for
- Tax 2 is None (0.0%), for DRC-enabled clients.
- To apply the 5% DRC rate: in the
- Tax 1 drop-down list, select None (0.0%), and in the
- Tax 2 drop-down list select Domestic Reverse Charge @ 5% (5%).
The DRC rate description you apply in the quote or invoice will override the default Tax 1 and Tax 2 descriptions (VAT and VAT 5, for example), which are also set up in the Business > Settings > Organisation Settings screen.
When you have completed the quote or invoice you require, you have two options to print your document. You can print it using:
- the system default print template if you have a single tax rate to apply, or
- a custom print template if you have a mix of 20% and 5% rates.
Using the system default print template
The system default print template has been updated for Clients where DRC is enabled. Tax subtotal and total fields display zero amounts, and the quote or invoice total is displayed exclusive of tax. If you have used the 20% rate for all items, the 5% rate will not be shown.
You need to ensure that you have made it clear on the invoice that the domestic reverse charge applies and that the customer is required to account for the VAT. You can add this to the invoice description field or job description field.
Using a custom print template
However, for a more comprehensive invoice or quote, or where you need to confirm different tax rates for different tasks and costs, we recommend that you use the special sample quote and invoice print templates. These are available on the Business > Settings > Custom Templates > Samples tab.
Look for the sample templates labelled:
- UK DRC VAT Invoice Sample, and
- UK DRC VAT Quote Sample.
For more information, please refer to the support centre article on Custom print templates.