After being postponed twice, 1st March 2021 finally sees the introduction of the domestic reverse charge on building and construction services.
What is the domestic reverse charge?
An anti-fraud measure introduced by HMRC, it aims to cut down so-called missing trader fraud where businesses charge and receive VAT and do not pay it over to HMRC.
Under the changes subcontractors will no longer be responsible for reporting the VAT due to HMRC and contractors will now need to report both the input and output VAT.
Who is affected?
CIS subcontractors will no longer charge VAT on their invoices to their CIS contractor customers. Instead, they need to include a statement that the customer is responsible for the VAT and show what rate of VAT should be applied.
CIS Contractors will need to include the input VAT and Output VAT on their subcontractor invoices to HMRC.
Not using the CIS Module in Xero yet?
If you are not already using the CIS module in Xero now would be a good time to make the switch, as not only does Xero automatically handle the reverse charge VAT on sales and purchase invoices, it also automatically deals with CIS deductions, creates all the necessary paperwork and allows Returns to be submitted directly to HMRC.
If you already have the CIS module activated then you just need to add the domestic reverse charge VAT rate.
From the Accounting, dropdown menu select Advanced and then Tax rates.
Click the Add domestic Reverse Charge Tax Rates button.
Clicking the Add domestic Reverse Charge Tax Rates button again will add the tax rates below.
If you are a subcontractor using the reverse charge rates will include the correct explanatory wording on the face of your invoices.
There are several other practical points to consider when accounting for the domestic reverse charge:
You will need to be using Making Tax Digital (MTD) for VAT reporting as the old non-MTD VAT Return doesn’t support the domestic reverse charge.
The VAT Cash Accounting Scheme can’t be used where services are subject to the reverse charge so reverse charge transactions are always reported on an accrual basis.
The Flat rate VAT report in Xero doesn’t support the domestic reverse charge so transactions need to be added manually using the reverse charge provisions.
For more information, HMRC are running a number of webinars and you can Register here
Please email or call Richard Woolgar on 0808 144 5575 if you’d like more information about adding the CIS module to your existing Xero subscription.
