From 1st October 2020, 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 October?
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 ahead of the 1st October implementation date. We will be adding an account level control that will activate the CIS VAT options. Once activated you can choose which clients and suppliers are in scope for the reverse charge and apply these markers when creating your invoices. We’ll provide a more detailed walkthrough closer to the implementation date.
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:
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.
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:
If you have any further questions you can alway post them below, we will do our best to assist you.