Sometimes referred to as the CIS Reverse Charge, the domestic reverse charge is due to come into effect from 1 October 2019
In this blog we will look at the practical aspects of applying the reverse charge. You can read a general overview of this change in our Tax Facts: VAT Reverse Charge Rules for Builders 2019.
The new rules broadly follow the definition of construction services contained in the Construction Industry Scheme (CIS).
There are some specific exclusions including installation of security systems, seating, blinds, and shutters, as well as professional services of architects, surveyors, and consultants unless supplied as a package with other services.
VAT charged to customers
Businesses providing services within the CIS (Construction Industry Scheme) definition must no longer charge VAT where their customer is:
(i) VAT registered; and
(ii) is providing construction services to a third party.
Accounting software updates
Looking at the three market leaders:
Xero have confirmed they will be ready in time and will keep users updated at Xero business community.
Sage 50 users can prepare by creating 3 new tax codes, one each linked to zero, standard, and lower rate, each ticked to include in vat return, and each ticked for reverse charge.
Quickbooks have confirmed they are working towards building the requirements in preparation for 1 October. You can check for updates on their website.
How it works
Sales invoice to main contractor using the new codes will update box 6 for the net value with no output tax in box 1.
Cost invoice from subcontractor using the new codes will update box 7 for the net value and add the appropriate tax value to box 1 output tax and to box 4 input tax.
In this way notional VAT is accounted for on the return with no actual payment due to or from HMRC.
Cash accounting scheme does not apply to reverse charge, for transactions using the new code the VAT point will be invoice not payment.
Flat rate scheme does not apply to reverse charge, a separate calculation will be required outside the scheme.
Invoice to end customer, no change, charge standard rate VAT as normal.
Invoice to intermediary contractor, specify amount and rate of VAT, include wording such as “Customer to pay the VAT to HMRC”.