10 March 2021
Explaining Domestic Reverse Charge for VAT
Domestic Reverse Charge for VAT
We have been receiving lots of enquiries about the above scheme which came into effect on 1st March 2021. It applies to all VAT registered construction businesses carrying out activities in a supply chain under the Construction Industry Scheme (CIS).
It has been designed to stop ‘Missing Trader Fraud’ where criminals were providing services in the supply chain, charging their customers VAT, and then going missing without paying the VAT over to HMRC. The scheme differentiates between the supply chain and End User. An End User is effectively the owner of the property who does not provide onward supplies. The End User needs to certify in writing their status and if that is the case then the supply will follow the historic VAT treatment.
If the contractor is an intermediary and not an End User then instead of adding VAT, he will need to replace that line with ‘Total Domestic Reverse Charge @20%’ at £0, and so only the net consideration will be due. Similarly subcontract supplies to the intermediary will be dealt with on the same basis.
An example is the easiest way to explain the position, whereby a contractor receives a £1,000.00 invoice with the narrative that it is a Domestic Reverse Charge VAT supply.
As long as it is recorded as such then the VAT return needs to include the following figures:
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In effect VAT in box one is the VAT that the supplier would have paid to HMRC. Then recovery takes place as usual, assuming that you are making standard-rated or zero-rated supplies.
But, the difference is no physical payment of monies takes place until the supply is made to the End User. All accounting software providers have updated their software to account for the new procedure. We recommend visiting their website and searching Domestic Reverse Charge VAT and they have all provided good notes on how to account for the charge.
So, in summary, if you are VAT registered and in a CIS supply chain, we recommend visiting the software website in the first instance to get up to speed with the requirements. If you are only ever an End User, your only change is a requirement to notify your subcontractors in writing of your status under the scheme.
