Reverse charge VAT and CIS

  • How to set up and apply reverse charge VAT to your CIS invoices
  • Before you can use reverse charge VAT, you must turn on the CIS options in the Settings. See Set up CIS for your business

From 1st March 2021, the way in which VAT is charged on the supply of services within the construction industry is changing. The new rules only apply to VAT registered businesses buying and selling services reported under the Construction Industry Scheme.

Under the new rules, the contractor buying from a subcontractor must account for the VAT being charged. This is known as reverse charge accounting.

Check out our blog for full details of the legislation and how it may affect you: https://www.sage.com/en-gb/blog/vat-reverse-charge-construction

What is reverse charge VAT?

With reverse charge VAT, it's the responsibility of the contractor, rather than the subcontractor, to account for VAT on their VAT return.

Usually when selling goods or services to another VAT registered business, you include the VAT on your invoice and account for it on your VAT return.

If you're a subcontractor, VAT is not charged on the sales invoice, although you do have to specify the VAT value and that the reverse charge rules are applied.

If you're contractor, as the business buying the goods or services, you record the reverse charge VAT when you receive the purchase invoice and the VAT is declared as a both a sale and purchase on your VAT return.

For example:

Ben the plumber does some building work for ABC Ltd and charge £6000. As ABC Ltd is a VAT registered business, Ben doesn't charge the VAT on the invoice he sends to ABC Ltd. The £1200 VAT that should have been due is shown on the invoice as being reversed. On Ben's VAT return, no VAT is recorded but the net value of the sales £6000 is included in the net sales (box 6).

ABC Ltd records Ben's invoice for the purchase of the building work. Although VAT isn't charged on the invoice, they report the £1200 VAT and apply the reverse charge rules. This is then reported on their VAT return in both Box 1 (sales) and Box 4 (purchases).

Services that fall under VAT reverse charge

The HMRC provides a list of those services where VAT reverse charge doesn't and doesn't apply.

Normally if any of the services you're invoicing for are subject to the reverse charge, then the reverse charge should be applied to the whole invoice, including materials.

To find out which services reverse charge applies to, check out the Govt website : VAT reverse charge technical guide

End users and intermediaries

If you're a main contractor and designated as an end user or intermediary, reverse charge should not be applied to invoices you receive from your sub-contractors.

To find out whether you are an end user or intermediary check out the Govt website : VAT reverse charge technical guide

In this case,

  1. Send a letter to each of your sub-contractors advising them that VAT should not be reversed on the invoices they send you. Download a template letter.
  2. Clear the VAT Reverse Charge check box on your sub-contractor contact records.

If you're a sub-contractor and receive a similar letter from your contractor, just clear the VAT Reverse Charge check box from your contractor's contact record.

The 5% rule

Normally if any of the services you're invoicing for are subject to the reverse charge, then the reverse charge should be applied to the whole invoice, including materials.

However, if the reverse charge part is 5% or less of the value of the whole invoice, this can be disregarded (this is referred to the ‘5% disregard’) and normal VAT rules will apply.

For example:

As a plumber you do two items of work for VAT registered business.

  • Carry our work on shop premises for £500. This is work comes under the reverse charge VAT rules.
  • Carry out work on the contractors head office for £10,000. This is non-reverse charge work as the contractor is the end-user.

As the reverse charge work is 4.76% of the total invoice value (£500 / £10,500), you need to charge 20% VAT on the whole invoice.

To find out when reverse charge VAT should be used, check out the Govt website : VAT reverse charge technical guide

How it works in Sage Accounting

Watch a video

For subcontractors

Contact records

We have added a new check box Reverse charge VAT to the Account Details tab (or Options tab for existing contacts) on customer contact records.

Select this check box to identify those CIS contacts where the reverse charge needs to be applied.

To make this easier for you, we will set this automatically for all CIS contacts that also have a VAT registration number. Simply clear the check box for VAT registered CIS contacts where reverse charge doesn't apply.

Sales invoices, estimates and quotes

We've added a new Use VAT reverse charge check box to sales invoices, estimates and quotes.

This check box is only visible when a contact using reverse charge VAT is selected. To help you, the check box is selected by default.

If reverse charge rules don't apply to a particular invoice, just clear this check box.

  • On the invoice, the VAT amount due is shown on the invoice and reversed so no VAT is charged.
  • On the VAT return, the Net sale is recorded in box 6 as normal.

What you need to do

  1. Make sure all VAT registered contractors have a VAT registrations number entered on their customer contact records. We will automatically set each existing VAT registered CIS contact to use reverse charge VAT rules.

  2. When entering sales invoices, estimates or quotes to send to your contractors where the reverse charge needs to be applied,
    1. Make sure Use VAT reverse charge on this invoice is selected.
    2. Enter the details as usual including the VAT rate and amount.

      The VAT breakdown shows that the reverse charge rules are applied and the VAT is reversed.

  3. On the VAT return,
    1. No VAT is declared.

    2. The net value shows in box 6 as normal.

For contractors

Contact records

We have added a new check box Reverse charge VAT to the Account Details tab (or Options tab for existing contacts) on supplier contact records.

Select this check box to identify those CIS suppliers where the reverse charge needs to be applied.

To make this easier for you, we will set this automatically for all CIS contacts that also have a VAT registration number. Simply clear the check box for VAT registered CIS contacts where reverse charge doesn't apply.

Purchase invoices

We've added a new Use VAT reverse charge check box to purchase invoices.

This check box is only visible when a contact using reverse charge VAT is selected. To help you, the check box is selected by default.

If reverse charge rules don't apply to a particular invoice, just clear this check box.

  • On the invoice, the VAT amount due is shown on the invoice and reversed so no VAT is charged.
  • On the VAT return, the VAT is recorded as sale (box 1) and a purchase (box 4) .

What you need to do

  1. Make sure all VAT registered subcontractors have a VAT registration number entered on their supplier contact records. We will automatically set each existing VAT registered CIS contact to use reverse charge VAT rules.
  2. When entering purchase invoices from your subcontractors where the reverse charge needs to be applied,
    1. Make sure Use VAT reverse charge on this invoice is selected.
    2. Enter the details as usual including the VAT rate and amount.

      The VAT breakdown shows that reverse charge rules are applied and the VAT is reversed.

  3. On the VAT return,
    1. The VAT is declared as a sale (box 1) and a purchase (box 4).

    2. The net value shows in box 7 as normal.

Other considerations

Recurring invoices

If you send recurring invoices to your contractors, we will automatically pause these on 1st March, so you can update them to use the reverse charge VAT rules where necessary.

Credit notes

There may be times when you need to allocate a credit note to a CIS invoice.

Where an invoice has reverse charge VAT applied, the credit note must also include reverse charge VAT. This is to make sure your VAT return and ledger accounts are updated correctly.

When this is not the case , you'll see an error and be prevented from allocating the two together.

Entering transactions before 1st March

We will update your software and add the new check boxes before the 1st March deadline. However, once your software is updated, the new check box on sales and purchase invoices will only be visible for transactions dated from 1st March onwards.

Any future dated transactions will need to be amended where the reverse charge rules will apply after 1st March.

For retrospective transactions entered after 1st March but dated before that, the reverse charge check box will not be available.

How reverse charge affects your ledger accounts

Sales transactions made after 1st March will no longer be posted to the VAT on Sales .

The CIS amount is now deducted from the net value of the invoice, reducing the amount your customer owes you.

For example, for sales invoices for £200 Labour with a 30% deduction rate

Before 1st March   After 1st March
Debit Credit
Trade Debtors 180  
CIS Withheld 60  
CIS Labour   200
VAT on Sales   40
 
Debit Credit
Debtor Control 140  
CIS Withheld 60  
CIS Labour   200

 

Purchase transactions made after 1st March will have two entries to the VAT on Purchases ledger account. As the two VAT entries effectively cancel each other out, the net value of the invoice after the CIS deduction is less, reducing the amount you owe your supplier.

For example, for a purchase invoice for £100 labour with a 30% deduction rate.

Before 1st March   After 1st March
Debit Credit
Trade Creditors 90
CIS Withheld   30
CIS Labour Expense 100  
VAT on Purchases 20  
 
Debit Credit
Trade Creditors 70
CIS Withheld   30
CIS Labour Expense 100  
VAT on Purchases 20  
VAT on Purchases   20

For credit notes entered after the 1st March, your ledger accounts will be updated in the same way but in reverse.

VAT Cash Accounting

If you're using the VAT cash Accounting scheme, invoices with reverse charge applied are reported on your VAT return when the invoice is raised, rather than when it is paid.

Flat Rate VAT

If you're using the Flat Rate VAT scheme:

  • Sales invoices with reverse charge applied are included in your box 6 figure but excluded from the flat rate calculation.
  • Purchase transactions with VAT reverse charge, are outside of the flat rate scheme. Purchase transactions with reverse cahrge VAT are recorded as if you were on a standard scheme in boxes 1, 4 and 7.