What Is Domestic Reverse Charge

What is the domestic reverse charge:

A change in the way CIS registered construction workers handle and pay VAT.

When does it apply:

Domestic reverse charge became effective on 1 March 2021.

Who does it affect:

Individuals or businesses within the CIS scheme who are VAT registered. It applies to standard and reduced rate supplies.

What does it mean for you:

• If you are a subcontractor:
  • You will no longer charge VAT to your CIS customers if they are not the end-user of your service (the end-user is the final customer who will not make an onward supply of the building and construction services supplied to them).
  • You will need to state on your invoices that the customer is responsible for VAT and show the VAT rate that would apply to your sale.
  • The value of the sale will be included in your net sales figure on your VAT return, but no output VAT will be included.
  • If your customer is the end-user or your supply is zero-rated, then you will account for VAT in the normal way and the domestic reverse charge will not apply.

• If you are a contractor:
  • You will report the VAT from your subcontractors’ invoice as both output VAT and input VAT.
  • The net value of the invoice will be reported in your net purchases amount but NOT in your net sales amount.

Impact on your business:

• Cash flow:
  • If you are a subcontractor then this change will have a negative impact on your short-term cash flow as you will now be receiving the net amount of your sales invoice rather than the gross. Many businesses rely on the time delay between receiving the VAT element of their sales invoice and paying it over to HMRC. Businesses should, therefore, consider how they will deal with this change.
  • If you are a contractor then this change will have a positive impact on your short-term cash flow as you will only be paying the net amount to your subcontractors rather than the gross.

• Accounting systems:
  • If you are a contractor then the way you report your purchases from your subcontractors has changed. You will need to ensure that your accounting systems are sufficient to help you deal with this change. Most cloud accounting software is equipped to deal with the domestic reverse charge, so if you are not using cloud software yet then now may be a good time to start.

• Flat rate VAT scheme:
  • You cannot account for reverse charge supplies using the flat rate scheme. Reverse charge supplies must be dealt with as outlined above.
  • If you are on the flat rate scheme and the domestic reverse charge applies to you then you will need to consider if it is still beneficial for you to remain on the scheme.

• VAT refunds:
  • If you are a subcontractor and all, or majority, of your sales, are dealt with through the reverse charge scheme then it is likely that your VAT returns will now result in refunds being payable to you as you will claim the VAT on all your relevant purchases but will have no, or little, VAT to pay over on your sales.

If you need any help or advice on the Domestic Reverse Charge, please do not hesitate to contact us and we will provide all the assistance you need.