Construction Reverse Charge
Q: My client is a UK VAT registered subcontractor who operates the Flat Rate Scheme (FRS) at the present time and is supplying construction services within the Construction Industry Scheme (CIS) to someone who is not an end user. I understand that they will need to treat these types of sales under the new domestic reverse charge (DRC) VAT rules that started 1 March 2021. How do these new rules apply within the FRS though? Does the 9.5% I am accounting for at present (on labour with materials >10%) get applied to only non-DRC supplies?
A: The special FRS VAT accounting rules do NOT apply to any purchases or sales on which the new DRC applies. As this sales income has been reverse charged to the customer, no FRS % should be applied to this DRC income. The FRS 9.5% VAT calculation would however still need to be applied to any income that does not fall within the DRC. Consideration is needed as to whether it would be beneficial to come off the FRS in order to get back VAT on purchases, especially if the majority of sales will be under the DRC, but purchases will not.