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Domestic reverse charge VAT for construction services

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Please note that domestic reverse charge VAT is not the same as reverse charge VAT on Purchases of services from abroad.

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Contractors purchasing services subject to the domestic reverse charge

Sub-contractors supplying domestic reverse charge services

Introduction

The domestic reverse charge for building and construction services is effective from 1 March 2021.

This requires UK VAT registered contractors to account for output VAT on certain types of construction services supplied to them by UK VAT registered sub-contractors, subject to certain conditions.

Normally the supplier charges output VAT to the customer on the sale and the supplier then pays the VAT to HMRC. However, for services subject to the domestic reverse charge, the customer (the contractor) accounts for the output VAT and pays it to HMRC, rather than the supplier (the sub-contractor), 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 the domestic reverse charge

Note: If you are on cash accounting, do not follow the steps below, please instead refer to Domestic reverse charge VAT for construction (if on cash accounting).

VT Transaction+ versions from April 2020 can account for domestic reverse charge VAT for construction. Please make sure you have the latest version from here. 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

Value of reverse charged output VAT, analysed to the VAT output account. This should be a minus value.

Line 2

The same value, to account 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, as you would normally do for a purchase transaction. This account should be set to within the scope of VAT. If you need to change the scope, you can do so by selecting Set Up>Accounts>All, then selecting the account and Properties.

3.If you are entering a PIN transaction, leave the Type of sale (for VAT purposes) setting as Normal.

4.Save the transaction.

For example:

PIN_DRC

Screenshot showing the entry of a purchase subject to domestic reverse charge VAT

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.

The Cost of sales: Subcontractor costs account is used as an example. You can use a different Cost of Sales or Expenses account if it is more appropriate, so long as it is set to within the scope of VAT.

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, as described here.

Applying the CIS tax deduction

The process for domestic reverse charge VAT above can be used in conjunction with the process for CIS tax deductions (explained here). In this case the purchase would be entered as shown in the example below (for £100 of services provided), using the PIN or PAY transaction.

PIN_CIS_&_DRC

Screenshot showing the entry of a purchase subject to domestic reverse charge VAT, and the CIS tax deduction

The Creditors: HMRC (CIS) account needs to be created by selecting Set Up>Accounts>New, and should be set to outside the scope of VAT.

The Cost of sales: Subcontractor costs account is used as an example. You can use a different Cost of sales or Expenses account if it is more appropriate, so long as it is set to within the scope of VAT.

Note that the values in Total: and  Net: should be the VAT exclusive amount after CIS, i.e. £80.00 in the example above. Although it may look odd that £80 is in the Net field, it is the £100.00 from the main body of the invoice that will rightly get picked up in Box 7 of the VAT return as the net value of the purchase.

Completing your VAT return

If you enter the purchase as described above, the VAT return will automatically be populated with the required values in the appropriate boxes as follows:

VAT return element

Included in VAT return

Amount included (per example above)

Reverse charged output VAT

Box 1

20

Input VAT reclaimable

Box 4

20

VAT exclusive amount of purchase (pre-CIS deduction)

Box 7

100

Sub-contractors supplying domestic reverse charge services

If you make a supply subject to the domestic reverse charge, you will not charge the customer VAT on the sale, but the net value of the sale needs to be included in Box 6 on your VAT return. Therefore the analysis account used for the sale should be set to within the scope of VAT. If you need to change the scope, you can do so by selecting Set Up>Accounts>All, then selecting the account and Properties.

To enter the sale:

1.If you have already generated a sales invoice elsewhere, use the SIN (not underscored) function, select No VAT in the VAT Output field, and leave the Type of sale (for VAT purposes) setting as Normal:

SIN_DRC

 Screenshot showing the entry of a sale subject to domestic reverse charge VAT

Or:

1.Raise a sales invoice using the SIN function and set up a service by selecting Set up>Invoices>Products and Services, and select the VAT rate as Zero Rate. (This is not actually 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). Leave the Type of sale (for VAT purposes) setting as Normal.

2.If sales invoice document will show a line for VAT at 0% of 0.00. You may prefer it not to display this line. If so, you can hide it by following the steps at Hiding the VAT line on an invoice.

3.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

Details of your requirements in this respect can be found in HMRC guidance here.)

This can be done on each SIN by entering text in the Optional text at bottom of invoice box. Or, it may be more practical to set up an invoice template with part of the required wording, by selecting Setup>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 normal VAT invoices, you can use the REC transaction to record the sales. Select No VAT in the VAT Output field.

Applying the CIS tax deduction

The process for domestic reverse charge VAT above can be used in conjunction with the process for CIS tax deductions (explained here). In this case the sale would be entered as shown in the example below (for £100 of services provided), using the SIN or REC transaction.

SIN_DRC_&CIS

Screenshot showing the entry of a sale subject to domestic reverse charge VAT, and the CIS tax deduction

The Debtors: HMRC (CIS) account needs to be created by selecting Set Up>Accounts>New, and should be set to outside the scope of VAT.

The Income: Fees account is used as an example. You can use a different Income account if it is more appropriate, so long as it is set to within the scope of VAT.

Completing your VAT return

As the sub-contractor/supplier, you will not be charging output VAT on the supply. Therefore, no output VAT on the sale should be included in Box 1 of the VAT return. However, the net value of the supply is required to be included in Box 6.

When generating the VAT return, this will occur automatically if you have recorded the sale as described above.

Sales to non-VAT-registered customers

The domestic reverse charge does not apply to sales made by a sub-contractor to a customer who is not VAT-registered or is not liable to be registered for UK VAT. In this case, VAT should be charged in the normal way, by the subcontractor.

Impact of leaving the European Union

From 1 January 2021, the domestic reverse charge is unaffected by the departure of the UK from the EU as it is for supplies between UK VAT registered businesses.