Domestic Reverse Charge (DRC) Setup and Management

Understanding the Domestic Reverse Charge (DRC) is crucial for businesses in the UK construction industry. Effective from 1st March 2021, the DRC shifts VAT payment responsibility from the supplier to the customer for certain construction services. This article provides guidance on enabling and managing DRC within BigChange, ensuring compliance with HMRC regulations.

Enabling the Scheme

Setting Up VAT Codes

To facilitate the DRC, specific VAT codes must be configured within BigChange. These codes may vary, so consult your financial adviser for accuracy.

Sage Users: Use T21 for standard rate CIS and T26 for reduced rate CIS. If these are unavailable, the next available number will be used.
Xero Users: Refer to the Xero article for detailed instructions.

Steps to Enable DRC in BigChange:

Navigate to: [Top menu] Account settings (icon) → Settings → [side menu] → Financial → VAT codes.
Select or create a new VAT Code such as T21 (Sage).

Select the Profiles tab.
Select the Domestic Reverse Charge checkbox and select Save.

This setup allows the new tax code to be selected when creating or editing VAT profiles.

Set up Customer-Specific Profiles

Creating VAT Profiles in CRM

Once the scheme is enabled, create VAT profiles for each contact in the CRM to apply the DRC automatically.

Step 1:

Navigate to: CRM → [side menu] Contacts → select contact
1. [tab] Financial.
2. Select the VAT subtab.
3. Select Add VAT Profile to set up a customer-specific VAT Profile.

Complete the form by ensuring:

Domestic Reverse Charge is active.
Decide if it applies to Child Contacts as well.
Fill in mandatory tax information fields.
Optionally, set a Review Date for the VAT Profile.

Step 2:

Select 'Add tax code replacement' on the Profile.
Specify the current and new tax codes (e.g., T1 becomes T21).

By default, all items within your BigChange system are eligible for DRC.

To change this select the 'Non-eligible items' tab and select which options you would like to make non-eligible items. Once you have chosen your non-eligible items save your changes.

Line Item Behaviour

Understanding Line Item Scenarios

When a contact has a live DRC profile, the Financials tab will display an orange banner indicating DRC status. Here are four scenarios for line item behaviour:

No VAT Profile: The tax code remains unchanged (e.g., T1).
Non-Eligible Items Only: The tax code remains unchanged (e.g., T1).
Mixed Eligible and Non-Eligible Items: All items display the new tax code (e.g., T21), unless eligible items are less than 5% of the total, in which case the original code is used.
All Eligible Items: All items display the new tax code (e.g., T21).

A DRC field beneath the totals will show the amount your customer must pay.

Templates & Invoicing

Customising Invoices for DRC

Invoices under DRC must include the tax amount payable by the customer and HMRC-approved wording. BigChange's standard financial documents include this, but custom templates can also be used.

Steps to Add Keywords:

Navigate to: [Top menu] Account settings (icon) → Settings → [quick links menu] Templates
Add or edit a template and insert the 'VAT profile text' keyword from the Financial tab section.

The placeholder text will display as 'Customer to pay the VAT to HMRC: {Deduction Amount}' on the template.

Additional Keywords:

VAT Registration Number
UTR
Organisation Type
VAT Profile

These can be found under: [Top menu] Account settings (icon) → Settings → [quick links menu] Templates → [tab] [section] Contacts & notes.

Conclusion

Understanding and implementing the Domestic Reverse Charge within BigChange is essential for compliance with UK VAT regulations in the construction industry. Ensure your system is updated and consult a financial advisor for specific guidance. For further assistance, explore BigChange's resources or contact support.