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Construction Industry Scheme (CIS) Reverse Charge

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Summary

This guide explains how to process CIS Reverse Charge in Sage 50cloud Accounts.

Description

The way in which VAT is charged on construction services changed in March 2021, as a result of new anti-fraud rules introduced by HMRC. Sage 50cloud Accounts includes new features to deal with these changes, such as new tax codes to use. Let's take a look at them now.

Resolution

New tax codes

Two tax codes have been introduced in Sage 50cloud Accounts v26 and above:

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

These tax codes can be used by both the subcontractor and the main contractor and ensures that the VAT Return is updated correctly. These must be used for both your sales and purchase transactions, where domestic reverse charge applies

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

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

TIP: To download and install v26 and above visit our Installation Help Centre.

NOTE: What to do if I don't use Sage 50cloud Accounts v26 or above? - Read more >


How do the tax codes work?

TIP: The new tax codes can also be used if you post invoices from third party applications.

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.

Standard VAT
  • 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, will be 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 the T21 or T26 tax code is used, the values from the invoice or credit will update the VAT Return, not the payment or receipt as would be expected 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 the T21 or T26 tax code is used, then the invoice or credit note produced in Sage 50cloud 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'

If the CIS Reverse Charge messages don't appear on standard layouts in v26 and aboveRead more >

NOTE: If you use an earlier version of Sage 50cloud 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.

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