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VT Transaction+

Navigation: Value Added Tax > Domestic reverse charge VAT for construction services

Purchases by contractors (cash accounting)

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Please note that the information on this page is for general guidance only and should not be taken as tax advice, since individual circumstances may vary. While guidance from HMRC indicates that domestic reverse charge (DRC) transactions should be excluded from the cash accounting scheme, there may be exceptions to this depending on your particular circumstances. If you are unsure, you should seek tax advice from an accountant.

DRC transactions can be excluded from cash accounting in VT Transaction+ by following the steps below.

Introduction

According to HMRC VAT Notice 735: Domestic Reverse Charge Procedure (which includes construction services), para 10.8.2:

'Businesses using the cash accounting scheme should exclude sales and purchases that the reverse charge applies to from the scheme. These supplies should be accounted for under the reverse charge provisions.'

This indicates that businesses who use cash accounting for VAT, should exclude DRC transactions from the scheme and account for them under the standard accounting method, i.e. where VAT/net value is accounted for at the time of the invoice (rather than at the time of payment under cash accounting). However there may be exceptions to this depending on your particular circumstances.

To enter a DRC purchase outside of the cash accounting scheme:

Note: If you are not on cash accounting, do not follow the steps below, please instead refer to Purchases by contractors

As explained in the previous section, businesses who use cash accounting for VAT, are normally required to exclude any DRC transactions from the scheme and instead account for them under standard accounting (although there may be exceptions to this depending on your particular circumstances).

If you are required to exclude a DRC purchase from the cash accounting scheme, enter the transaction as follows:

1.You will already have selected Cash Accounting in the VAT set up dialog (Set Up>VAT). Leave this setting as Cash Accounting.

2.Create a new Cost of Sales/Expense account (Setup>Accounts>All>New) and name it something like ‘Domestic reverse charge services’.

DRC account

3.Although it may seem counter-intuitive, do not tick the box that says ‘Entries analysed to this account are normally within the scope of VAT’ as you do not want this transaction to be picked up in the VAT return under the cash accounting method. Instead, the purchase will be picked up in the VAT return by entering the journal described in Step. 5.

4.Enter the purchase using a PIN or PAY transaction, but with no VAT:

Total

Net value of purchase

Input VAT

No VAT

Net

Net value of purchase

In the Analysis Account field, select the account you created in step 2. If you need more analysis accounts, create them from new as described in step 2, ensuring that they are set up as not being within the scope of VAT. Do not select any analysis accounts that are within the scope of VAT.
For example, for a purchase of £100 of services:        

pin0090

5.To account for the VAT, use the JRN function (or journal import function) to enter a journal to debit VAT - Input and credit VAT - Output with the reverse charge VAT. You should use the same date you used for the purchase transaction in step 4. Ensure that you enter the net amount in the Net column for the entry to the VAT - Input account.

For example, for a purchase with a net value of £100.00 and reverse charge VAT due of £20.00:

Dom_rev_chg_VAT_cash_ac

Screenshot of a journal entry to account for domestic reverse charge VAT
You should make reference to 'reverse charge' in the Transaction details field, so that you can identify output VAT due under the reverse charge, in the Backup report of the VAT return. You should also make reference to the associated purchase transaction number, or the supplier's invoice number in the Entry details field, so that you can trace the transaction back to the invoice.

Completing your VAT return

If you enter the journal as described in step 5. 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 (from example above)

Entry from journal in step 5. which populates VAT return

Reverse charged output VAT

Box 1

20.00

Line 2: Credit: VAT - Output

Input VAT reclaimable

Box 4

20.00

Line 1: Debit: VAT - Input

Net value of purchase

Box 7

100.00

Line 1: Net: VAT - Input

Applying the CIS tax deduction

If you need to also apply the CIS deduction, follow the same steps as above, with the only differences being in step 4, where:

an additional line is entered for the CIS deduction

the value in the Total and Net fields is the VAT exclusive amount less the CIS deduction

A purchase for £100 of services with a CIS deduction of 20% should be entered as follows, using the PIN or PAY transaction:

PIN_CIS2

Screenshot showing the entry of a purchase subject to domestic reverse charge VAT and the CIS tax deduction (if on cash accounting)

The Creditors: HMRC (CIS) account needs to be created by selecting Set Up>Accounts>New. Do not tick Entries analysed to this account are normally within the scope of VAT.

HMRC (CIS)

Using this example, the VAT return will be populated with the same values shown in Completing your VAT return above.