Construction Industry Scheme (CIS) Domestic Reverse Charge

[Glenn]

From 1st March 2021, VAT registered businesses operating in the building and construction industry will need to change the way they collect and report VAT.

The new changes will require businesses that are receiving a service from a CIS registered contractor to pay the VAT to HMRC, rather than paying the VAT to the supplier. These changes will apply only to UK VAT registered businesses or individuals supplying services under the Construction Industry Scheme (CIS).

How is QuickFile preparing for the changes on 1st March?

We will provide additional controls that will allow invoices to be flagged for the CIS reverse charge. The necessary adjustments will then be automatically applied to your VAT return.

These new settings will be available from the 1st March implementation date. We will be adding an account level control that will activate the CIS VAT module. Once activated you will be able to apply CIS VAT options when creating your invoices and puchases. You can find more detail on how to apply the specific CIS VAT options in the guide below.

Guide: using the new CIS VAT options in QuickFile

What supplies are in scope for the VAT reverse charge?

You can find a list of supplies that are applicable for the VAT reverse charge on the HMRC website. Follow the link below for more details:

Services affected by the domestic reverse charge

We’ve included a flow chart below to help you identify the supplies that will be in scope for the CIS VAT reverse charge.

Where a service is supplied that is in scope for the VAT reverse charge, all other services (even if that service would otherwise be excluded) must also be subject to the VAT reverse charge.

Verifying the VAT status of your customers

Before the VAT reverse charge can be applied you need to be confident that your customer is registered for VAT. For now you can use the free EU Commission’s VAT checking service on the link below to verify the VAT status of your customers.

http://ec.europa.eu/taxation_customs/vies/

Cash Accounting Scheme

The Cash Accounting Scheme cannot be used for the supply of services that are subject to the reverse charge. All CIS reverse charge invoices must be reported on an invoice basis (i.e. based on when the invoice was created, not when it was paid).

Flat Rate VAT Accounting Scheme

The Flat Rate VAT scheme requires businesses to pay an agreed percentage of VAT (e.g. 9.5%, 14.5% or 16.5%) on their VAT inclusive turnover while foregoing the ability to reclaim input VAT. From 1st October 2020 those businesses that will be required to apply the reverse charge will still need to pay the Flat Rate percentage from their net income. It is therefore likely to become detrimental for those affected by these changes to remain on the Flat Rate VAT scheme.

Accounting for the Reverse Charge on your VAT Return

If you are using QuickFile to prepare and submit your VAT return, the reverse charge adjustments will be automatically applied based on the invoices that you have marked as in scope.

Sub contractor example

A sub contractor raising an invoice of £1,000 + standard rate vat to a main contractor will create a sales invoice for £1,000 net. The £200 vat will appear on the invoice but will be reversed off again. The main contractor will then pay £1,000 to the sub contractor to settle the invoice. On the sub contractor’s VAT return they will see £1,000 in box 6. No VAT figure will be entered in box 1.

Main contractor example

The main contractor receiving services from a sub contractor to the value of £1000 + standard vat will receive a £1,000 invoice with no VAT to pay. The invoice will be marked as in scope for the domestic reverse charge.

The input VAT on a reverse charge purchase will appear on box 4 of the VAT return, but will be reversed in box 1, resulting in a net zero liability. The net amount of the purchase invoice will appear in box 7 of your return, as would normally be the case.

Find out more about the CIS domestic reverse VAT charge

HMRC has published a comprehensive guide covering a variety of subjects around the reverse VAT charge for CIS. You can find out more on the link below:

HMRC Guide - CIS domestic reverse VAT charge

If you have any further questions you can alway post them below, we will do our best to assist you.

[ian_roberts]

Will you also be adding support for the normal overseas reverse charge alongside this (for people buying services from overseas suppliers)?

[Glenn]

We’re not planning to make any changes to EU VAT handling at the moment. The UK is set to leave the EU VAT regime by the end of this year. As soon we gain some clarity on the new rules, we will ensure that the required changes are implemented.

[ian_roberts]

Thanks for the update. Of course the reverse charge isn’t just an EU thing, it applies to any supply of services from overseas whether or not the supplier is EU based.

[Glenn]

As the vast majority of the reverse charge scenarios are applicable to the purchase of services in the EU, it would be preferable for us to get a clear picture of the VAT regime that will be implemented from 1st January 2021. Changing our VAT logic during the transition period will require differentiation of goods vs services, which will likely become redundant with the implementation of the new rules. As I’m sure you’ll appreciate, we don’t want to start rebuilding complex parts of our VAT logic before being very clear on these important points. Happy to discuss this on a different thread, but would rather focus the conversation towards the CIS changes here.

[Aspyre_Accountancy]

Hi Glen. I am glad QuickFile is on the case.

Can I check your flowchart as the final question per the HMRC example is different to yours, I think. maybe you could clarify it for me?

[csaba]

The chart at the top of the thread is incorrect regarding the last step, your version is right @Andreproberts. Hopefully this will be changed not to confuse other users.

[Glenn]

@Aspyre_Accountancy thank you for pointing that out, we’ve now updated the flow chart.

[galarahul]

We purchase certain products from UK suppliers whereby buyer accounts for the output tax. For this we use reverse charge functionality by registering a UK based supplier as if it was based in EU to get half of VAT return right & EU boxes are manually adjusted to deduct the values.

This manual method becomes very cumbersome & prone to error if like us the business also supplies & purchases from EU, and at the same time deals in products purchases from UK based supplier which need to be reverse charged. This makes VAT return quite complicated.

It would be great if a flexible reverse charge feature is introduced for domestic purchases / supplies, which can take care of various types of users/industries instead of just one particular industry as I believe the principle will remain same irrespective of industry.

Thanks.

[Fauxman24]

As the starting date of 1st March 2021 is approaching, how close are you to updating the software to handle the CIS Reverse Charge VAT on Invoices and the VAT Return?
Regards

[Glenn]

All the updates were done last year and are currently hidden in the software. They will be switched on during the release scheduled for 28th February.

Once these features are available to use you will first need to switch on the CIS VAT handling module in the advanced settings area:

From there on you will be able to apply the CIS reverse charge VAT option to your sales and purchase invoices directly from the invoice editor.

With this option selected the reverse charge will automatically be applied to your VAT return.

[Fauxman24]

Thank you for the prompt reply.

[csaba]

We will have our first VAT return to be submitted in the coming month, where the Domestic Reverse Charge for CIS will make it’s appearance.
Client is on Cash Accounting for VAT, but DRC transactions must be reported on Accruals basis. Could anyone confirm if Quickfile will pick this up, or if manual adjustments will be needed for this on the current return when bills are received, reversed on the next one when payment takes place?

[QFMathew]

Hi @csaba

The CIS DRC invoices are accounted for in VAT returns on an accrual basis, so even if they’re unpaid they should be included.

However, we recommend that you always check your calculations report to ensure they are accurate.

[csaba]

Great! I was not not really expecting this, so it made my day! I will of course check the calcs once we get to the stage of preparing the VAT return. Thank you!