The VAT charge on construction services changed in March 2021, as a result of new anti-fraud rules introduced by HMRC. Sage 50 Accounts includes features to deal with these changes, such as new tax codes to use. 

TIP: For more information, visit our CIS Domestic Reverse Charge Help Centre.

Tax codes for CIS Reverse Charge

We introduced two tax codes in Sage 50 Accounts v26 and above:

• T21 - where CIS Reverse Charge Standard Rate applies.
• T26 - where CIS Reverse Charge Reduced Rate applies.

You can use these tax codes if you're the subcontractor or the main contractor, to ensure the VAT Return is correct. Use them for both your sales and purchase transactions. Visit gov.uk to read the VAT domestic reverse charge technical guide for more information. 

If tax code T21 or T26 is already in use, use the next available tax code.

To have these tax codes in your software automatically, you must have Sage 50 Accounts v26 and above.

TIP: You can download and install v26 and above from our Installation Help Centre.

How do the tax codes work?

Under reverse charge, the responsibility for paying VAT to HMRC moves from the subcontractor to the main contractor. Usually this VAT will be recoverable for the main contractor. When you use the T21 or T26 tax code, you only need to enter the net amount, the VAT calculation completes automatically.

 TIP: You can also use the new tax codes if you post invoices from third-party applications.

Standard VAT

• When a subcontractor uses tax code T21 or T26 on an invoice, Box 6 of the VAT Return updates with the net sale amount
• When a main contractor uses T21 or T26 for a purchase, the net value affects Box 7 of the VAT Return. The VAT value affects Boxes 1 and 4. The contractor pays and reclaims the VAT on the same VAT Return, often termed Notional VAT

VAT Cash Accounting

VAT Cash Accounting rules don’t apply to reverse charge transactions. When reverse charge applies and you use T21 or T26, the invoice or credit values update the VAT Return, not the payment or receipt.

Flat Rate VAT

Flat Rate scheme rules don’t apply to reverse charge transactions. When using the Flat Rate scheme, subcontractors or main contractors account for reverse charge transactions outside the scheme with tax code T21 or T26.

Invoices and credit notes

When you use tax code T21 or T26, we automatically include the following text on standard invoice or credit note layouts:

• Invoice text - 'Customer to pay output tax of £X to HMRC’
• Credit note text - 'Customer to account for output tax of -£X to HMRC'

Can't see the CIS Reverse Charge message on your invoice or credit note layout?

Find out what to do if CIS Reverse Charge messages don't appear on standard layouts in our article.