Reverse charge VAT and CIS

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

What is VAT domestic reverse charge?

Under domestic reverse charge, businesses supplying construction services must not charge VAT where their customer is:

Instead of the supplier charging VAT, the recipient of the services must self-account for VAT on the services received. We call this reverse charge accounting.

HMRC provides a list of those services where VAT reverse charge does and doesn't apply. Under the rules, if reverse charge applies to any of the services on a single invoice, you must apply reverse charge to the whole invoice. This also includes materials. To find out which services the reverse charge applies to, read HMRC's VAT reverse charge technical guide.

How it works in Sage Accounting

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Impact on the VAT return

If you're using the VAT Cash Accounting scheme, invoices with reverse charge show on your VAT return. This happens when you raise the invoice, not when you pay it.

For the Flat Rate VAT scheme, we report reverse charge sales in box 6 but exclude them from the flat rate calculation.

Purchase transactions with VAT reverse charge are outside of the flat rate scheme. We report purchase transactions with reverse charge VAT in boxes 1, 4, and 7 as if on a standard scheme.

Impact on Allocations

When issuing a credit note for a CIS invoice with reverse charge VAT, you must also apply reverse charge VAT to the credit note. This ensures your VAT return and accounts are accurate. Otherwise, trying to allocate a mismatched credit note will result in an error message.