Please note that this topic is different to Reverse charge VAT on services from abroad.
The domestic reverse charge for building and construction services is effective from 1 March 2021.
This requires VAT registered contractors to account for output VAT on certain construction services supplied to them by VAT registered sub-contractors.
Normally the supplier (in this case, the sub-contractor) charges output VAT to the customer (in this case, the contractor) on the sale and the supplier then pays the VAT to HMRC. However, for the domestic reverse charge, the customer accounts for the output VAT and pays it to HMRC, hence the term reverse charge. Input VAT is also reclaimable by the customer on the same transaction (provided they can fully recover input VAT).
Please note the information in this article is for guidance only and should not be taken as definitive VAT advice, since individual circumstances may vary. For details of obligations under the domestic reverse charge, please refer to HMRC guidance here.
Contractors purchasing services subject to reverse charge
The accounting treatment is the same as that for Reverse charge VAT on services from abroad, except that the net value of the purchase is not included in Box 6 of the VAT return.
To enter the purchase:
1.Using the PIN or PAY transactions, enter the following in the header section:
|Total: Net value of purchase|
|Input VAT: No VAT|
|Net: Net value of purchase|
2.In the analysis of net amount section, enter:
|Line 1: the value of reverse charged output VAT, analysed to the VAT output account. This should be a minus value.|
|Line 2: the same figure, for input VAT reclaimable (provided you can fully recover input VAT), analysed to the VAT input account. This should be a plus value.|
|Line(s) 3(4..): details of the analysis account(s) for the net amount of the purchase, in the usual way.|
3.Save the purchase invoice
Screenshot of the entry of a purchase of reverse charge services
The entries in the screenshot above will ensure that output VAT of £20.00 is included in Box 1 of the VAT return, input VAT of £20.00 is included in Box 4, and the net value of the purchase of £100.00 is included in Box 7.
Please note that if you operate the flat rate VAT scheme and use the workaround described here to account for VAT, you may have to enter reverse charge transactions differently to the steps above.
Completing your VAT return
If you enter the purchase invoice along with the manual adjustment as described above, the VAT return will automatically populate with the required values in the appropriate boxes as follows:
VAT return element
Included in VAT return
Reverse charged output VAT
Input VAT reclaimable
Net value of purchase
Sub-contractors supplying reverse charge services
If you make a supply subject to the domestic reverse charge, you will not charge the customer VAT in your sales invoice, but the net value of the sale needs to be included in Box 6 on your VAT return
To enter the sale:
1.If you have already generated a sales invoice elsewhere, use the SIN (not underscored) function, enter nil VAT, and leave the Type of sale (for VAT purposes) setting as Normal; or
2.Raise a sales invoice using the SIN function and set up a service with the VAT rate as Zero Rate by selecting Set up>Invoices>Products and Services
|(Technically this is not a zero-rated sale for VAT purposes, however the zero rate option in the software will serve the purpose of including the sale in Box 6 of the VAT return.)|
You also need to state clearly on the invoice:
•that the domestic reverse charge applies, and that the customer is required to account for the VAT; and
•how much VAT is due under the reverse charge or the rate of VAT
(For full details of your requirements in this respect please refer to HMRC guidance here)
This can be done on each sales invoice by entering text in the Optional text at bottom of invoice box.
Alternatively, it may be more practical to set up an invoice template with part of the required wording, by selecting Set up>Invoices>Templates>New>General and entering text in the Optional text at bottom of invoice box.
Authenticated tax receipts
If you have used authenticated tax receipts for your sales, rather than invoices, you can use the REC transaction to record the sale with no VAT.
Completing your VAT return
As you will not be charging output VAT on the supply, no output VAT on the sale will be included in Box 1 of the VAT return. In Box 6, the net value of the supply should be included.
When generating the VAT return, this will occur automatically if you have recorded the sale as described above.