Reverse charge VAT and CIS

Usually, when selling goods or services to another VAT-registered business, you include the VAT on your invoice and report it on your VAT return.

With reverse charge VAT, the contractor is responsible for reporting both sales and purchase VAT on their VAT return. The subcontractor does not report the VAT from their sales.

Under the new rules

• If you're a subcontractor, you do not include VAT on the sales invoice. You do have to include the VAT value and show that you are applying reverse charge rules
• If you're a contractor buying the goods or services, you record the reverse charge VAT when you receive the purchase invoice. You report the VAT as both a sale and a purchase on your VAT return

Services that fall under VAT reverse charge

The 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 reverse charge applies to, check out the Government website: VAT domestic reverse charge technical guide

End users and intermediaries

In some cases, the main contractor may be designated as an end user or intermediary. When this happens, you do not apply reverse charge to the invoices you receive from your sub-contractors.

To find out whether you are an end user or intermediary check out the Govt website: VAT domestic reverse charge technical guide

If you are an end user or intermediary

1. Send a letter to each of your sub-contractors advising them that they should not reverse the VAT on the invoices they send you. You can download a template letter here.
2. Clear the VAT Reverse Charge check box on your sub-contractor contact records.

If you're a sub-contractor and receive a similar letter from your contractor, clear the VAT Reverse Charge check box from your contractor's contact record.

The 5% rule

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.

However, if the reverse charge part is 5% or less of the value of the whole invoice, you can disregard this and apply normal VAT rules.

For example:

As a plumber, you do two items of work for VAT-registered businesses.

• Carry our work on shop premises for £500. This work comes under the reverse charge VAT rules
• Carry out work on the contractor's head office for £10,000. This is non-reverse charge work as the contractor is the end-user

As the reverse charge work is 4.76% of the total invoice value (£500 / £10,500), you need to charge 20% VAT on the whole invoice.

To find out more about when to use reverse charge VAT, check out the Government website: VAT domestic reverse charge technical guide

How it works in Accounting Start

For subcontractors

Contact records

Enter a VAT registration number on the customer contact record for each contractor.

Find this on the Account Details tab (or Options tab for existing contacts) on customer contact records.

Sales invoices

To apply the reverse charge to sales invoices

1. Select the Use VAT reverse charge on this invoice checkbox.

2. Enter the details as usual including the VAT rate and amount. 

   The VAT breakdown section shows that we have applied the reverse charge rules.

This check box is only visible when you select a customer set up to use reverse charge VAT. To help you, we set the check box by default.

If reverse charge rules don't apply to a particular invoice, clear this check box.

VAT return

On the VAT return, the VAT amount is not included in Box 1. The net value is shown in box 6 as normal.

Other considerations

Credit notes

There may be times when you need to allocate a credit note to a CIS invoice.

If the invoice has reverse charge VAT, the credit note must also include reverse charge VAT. This is to make sure your VAT return and categories are updated correctly.

If you try to allocate a credit note without reverse charge VAT, we'll tell you in an error message to stop you from allocating the two together.

How reverse charge affects your categories

Sales transactions

We record the net value of each CIS item to the CIS materials or CIS labour category.

We deduct the CIS amount from the net value of the invoice, reducing the amount your customer owes you.

For example, for sales invoices for £200 Labour with a 30% deduction rate:

For credit notes, we update your categories in the same way but in reverse.

VAT Cash Accounting

If you're using the VAT Cash Accounting scheme, invoices with reverse charge show on your VAT return when the invoice is raised, rather than when it is paid.

Flat Rate VAT

If you're using the Flat Rate VAT scheme:

• Sales invoices with reverse charge report in your box 6 figure but are excluded from the flat rate calculation.

VAT domestic reverse charge VAT for mobile phones and computer chips