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. Let's take a look at them now.
TIP: For more information you can 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. You must use them for both your sales and purchase transactions, where domestic reverse charge applies.
If tax code T21 or T26 is already in use, you should 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.
If I don't use Sage 50 Accounts v26 or above?, you can use our handy Which code do I use for CIS Reverse Charge in v25 and below? guide.
How do the tax codes work?
Under reverse charge the responsibility for paying VAT to HMRC moves from the subcontractor to the main contractor. In most cases 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 for the VAT Return completes automatically.
TIP: You can also use the new tax codes can if you post invoices from third party applications.
- When a subcontractor uses tax code T21 or T26 on an invoice for their main contractor, Box 6 of the VAT Return, total value of sales excluding VAT, is updated with the net amount of the sale.
- When a main contractor uses T21 or T26 to record their purchase from the subcontractor, the net value of the purchase affects box 7 of the VAT Return, total value of purchases excluding VAT, and the VAT value affects boxes 1 and 4 of the VAT Return. The VAT is paid and reclaimed on the same VAT Return, this is often termed Notional VAT.
VAT Cash Accounting
VAT Cash Accounting rules do not apply to reverse charge transactions. So where reverse charge applies and you use the T21 or T26 tax code, the values from the invoice or credit will update the VAT Return, not the payment or receipt as you'd expect under VAT Cash Accounting.
Flat Rate VAT
Flat Rate scheme rules do not apply to reverse charge transactions. If the subcontractor or main contractor uses the Flat Rate scheme, they should account for reverse charge transactions outside of the scheme using tax code T21 or T26.
Invoices and credit notes
If you use the T21 or T26 tax code, the invoice or credit note produced in Sage 50 Accounts v26.2 and above includes the following text on standard layouts automatically:
- 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 CIS Reverse Charge message on your invoice or credit note layout?
If the CIS Reverse Charge messages don't appear on standard layouts, you can refer to our handy guide:
- CIS Reverse Charge messages don't appear on standard layouts - v26 and above
- If you use an earlier version of Sage 50 Accounts, or if you use a customised layout made in v25 and below, you can edit your invoice layout using Report Designer to show Domestic Reverse Charge. Find out how in our Show the Domestic Reverse Charge wording on invoices and credit notes guide.