Note: If you are not on cash accounting, do not follow the steps below, please instead refer to Raising a DRC sales invoice.
As explained in Sales by subcontractors (cash accounting), businesses who use cash accounting for VAT, are normally required to exclude any DRC transactions from the scheme and instead account for them under the standard accounting method (although there may be exceptions to this depending on your particular circumstances).
If you are required to exclude DRC sales from the cash accounting scheme, enter these transactions 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.Set up a service(s) by selecting Set up>Invoices>Products and Services, and select the VAT rate as Outside scope. The reason for selecting Outside Scope is that you do not want this particular sale to be picked up in the VAT return under the cash accounting method. Instead, it will be picked up in the VAT return by entering the journal described in step. 6.
|The description of the service(s) should include reference to the VAT rate for the service, and the wording 'reverse charge' as this is required on the invoice by HMRC as explained in Invoice documentation below.|
3.Select the SIN transaction and in the Name/code drop-down, select the service(s) you created in step 2. and save the transaction.
4.Ensure that your invoice document contains certain wording required by HMRC (see Invoice documentation below)
5.Generate the invoice document by clicking on the icon next to the transaction reference
6.To record the net value of the sale in the VAT return, use the JRN function (or journal import function) to enter the following journal with the same date as the sale transaction entered in step 3. In this example, the net value of the sale is 200,000.00. You can use the Entry details field to reference the associated sales transaction reference.
|Screenshot of a journal entry to record the net value of the sale in the VAT return if on cash accounting|
You are required by HMRC in their guidance here, 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 if the VAT amount cannot be shown, but the VAT amount should not be included in the amount charged to the customer
•reference to ‘reverse charge’
HMRC provide the following example of this:
To generate an invoice document in VT Transaction+ similar to HMRC's example, you need to:
•ensure that the description of the service(s) you set up in step 2 above, includes reference to the VAT rate for that service and the wording 'reverse charge'
•create a new invoice template that does not include VAT in the amount charged, and also contains text at the bottom to state that the customer is to account for the reverse charge. This can be done by following the steps at Creating an invoice template for DRC services.
Applying the CIS deduction
If you need to also apply the CIS deduction, follow the same steps as above with the only difference being the following in step 3:
•an additional line is entered for a CIS tax deduction service item
Using the same data as in the example above with a CIS deduction at 20%, the invoice is entered as follows:
The CIS Tax service item needs to be set up using the method explained here, with a price of £0.00 (the actual price is entered directly in the Price column on the invoice) and set to outside the scope of VAT.