The new domestic reverse charge applies from 1 March 2021, but who does it apply to, and what do they need to do?
When does the reverse charge apply to my services?
You will need to use the reverse charge if the following apply:
• You are VAT registered
• Your supplies are standard or reduced rated
• Your supplies are within the Construction Industry Scheme (CIS)
• Your customer is VAT registered
• Your customer is registered for CIS
• Your customer has not given confirmation that they are the end user
HMRC have a useful flowchart to follow when considering if the charge applies which can be found at this link.
Who is the end user?
The end user is the final customer for the services you are providing.
This would usually be a private individual but could also be a business who is VAT and CIS registered but who is not going to be making onward supplies of the services you are providing.
This could be the case if your construction services are provided in connection with, for example, works on a business’s head office or factory site.
An intermediary supplier can also be considered to be the end user if the two are connected. This could be because they both have an interest in the land (as landlord and tenant) or they are part of the same group of companies.
The reverse charge applies so what do I do?
You should issue an invoice as normal, except:
• Do not include VAT
• Include a note that the domestic reverse charge applies and the customer is required to account for VAT
• State how much VAT is due under the reverse charge OR show the rate of VAT charged
• Include the net value of the sale in box 6 of your VAT Return but no output VAT in box 1
HMRC have an example invoice at this link.
Most accounting software should be able to cope with the invoicing requirements and the application of VAT.
When does the reverse charge apply to my purchases?
You will need to use the reverse charge if the following apply:
• You are VAT registered
• The supplies you are receiving are standard or reduced rated
• The supplies you are receiving are within the Construction Industry Scheme (CIS)
• You are registered for CIS
• You are not the end user of the supplies
Again, HMRC has a useful flowchart for you to following at this link.
I’ve received a reverse charge invoice, what should I do?
You will need to account for the output VAT as well as the input VAT on the invoice:
• Do not pay any VAT over to your supplier
• Include the output VAT in box 1 of your VAT Return but do not include any sale in box 6
• Include the input VAT in box 4 of your VAT and the net value of the purchase in box 7
Again, most accounting software should be able to cope with the application of the reverse charge.
Is there anything else that I need to know?
The above provides only a summary of the domestic reverse charge and it is not possible to detail all of the ‘what ifs’ within the scope of this blog. If you have any questions at all please contact me for additional help and information.
Some ‘out of the ordinary’ situations that you might encounter would include the following:
• Supplies or purchases that are within the domestic reverse charge cannot be accounted for using the VAT flat rate scheme or cash accounting scheme and must be dealt with separately.
• The domestic reverse charge does not apply where contractors are provided by an employment business.
• Ordinarily, if any of the services in a single supply are within the reverse charge then the reverse charge should be applied to the whole invoice. However, if the reverse charge part of the supply is less than 5% of the value of the whole invoice then normal VAT rules apply.
For more information please contact me. HMRC have a lot of information on their website: to use this start here.
