Reverse charge VAT and CIS
This explains how to set up and apply reverse charge VAT to your CIS invoices.
This applies to VAT-registered businesses who buy and sell services under the Construction Industry Scheme. Under these rules, the contractor buying from a subcontractor must report the VAT. This is known as reverse charge VAT.
What is reverse charge VAT?
Usually, when selling goods or services to another VAT registered business, you include the VAT on your invoice and report it on your VAT return.
With reverse charge VAT, the contractor is responsible for reporting both sales and purchase VAT on their VAT return. The subcontractor does not report the VAT from their sales.
Under the new rules
-
If you're a subcontractor, you do not include VAT on the sales invoice. You do have to include the VAT value and show that you are applying reverse charge rules.
- If you're contractor buying the goods or services, you record the reverse charge VAT when you receive the purchase invoice. You report the VAT as a both a sale and a purchase on your VAT return.
Ben the plumber does some building work for ABC Ltd and charges £6000.
ABC Ltd is a VAT registered business. Ben sends an invoice to ABC Ltd. The total value of the invoice doesn't include the VAT amount. Instead, the £1200 VAT that should have been due shows on the invoice as reversed. The £1200 does not show on Ben's VAT return. The net sales box (box 6) includes the net value of the sale, £6000.
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 shows on ABC's 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 does and doesn't apply.
Under the rules, if reverse charge applies to any of the services on a single invoice, you must apply reverse charge to the whole invoice. This also includes materials.
To find out which services reverse charge applies to, check out the Govt website : VAT reverse charge technical guide
End users and intermediaries
In some cases. the main contractor may be designated as as an end user or intermediary. When this happens, you do not apply reverse charge to the 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
If you are an end user or intermediary
- Send a letter to each of your sub-contractors advising them that they should not reverse the VAT on the invoices they send you. Download a template letter.
- 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, clear the VAT Reverse Charge check box from your contractor's contact record.
The 5% rule
Under the rules, if reverse charge applies to any of the services on a single invoice, you must apply reverse charge to the whole invoice. This also includes materials.
However, if the reverse charge part is 5% or less of the value of the whole invoice, you can disregard this and apply normal VAT rules.
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 more about when to use reverse charge VAT, check out the Govt website : VAT reverse charge technical guide
How it works in Sage Accounting
For subcontractors
Contact records
Enter a VAT registration number on the customer contact record for each subcontractor.
Find this on the Account Details tab (or Options tab for existing contacts) on customer contact records.
Sales invoices, estimates and quotes
To apply the reverse charge to sales invoices, estimates or quotes
- Select the Use VAT reverse charge on this invoice cehckbox.
-
Enter the details as usual including the VAT rate and amount.
The VAT breakdown section shows that we have applied the reverse charge rules.
This check box is only visible when you select a customer set up to use reverse charge VAT. To help you, we set the check box by default.
If reverse charge rules don't apply to a particular invoice, clear this check box.
VAT return
On the VAT return, the VAT amount is not included in Box 1. The net value shows in box 6 as normal.
For contractors
Contact records
Enter a VAT registration number for all VAT registered subcontractors on their supplier contact records.
Find this on the Account Details tab (or Options tab for existing contacts) on supplier contact records.
Purchase invoices
To apply the reverse charge to purchase invoices
- Select the Use VAT reverse charge on this invoice checkbox.
-
Enter the details as usual including the VAT rate and amount.
The VAT breakdown section shows that we have applied reverse charge rules.
This check box is only visible when a you choose a supplier set up to use reverse charge VAT. To help you, we select the check box by default.
If reverse charge rules don't apply to a particular invoice, clear this check box.
VAT return
On the VAT return, the VAT shows as a sale (box 1) and a purchase (box 4). The net value shows in box 7 as normal.
Other considerations
Credit notes
There may be times when you need to allocate a credit note to a CIS invoice.
If the invoice has reverse charge VAT, the credit note must also include reverse charge VAT. This is to make sure your VAT return and ledger accounts are updated correctly.
If you try to allocate a credit note without reverse charge VAT, we'll tell you in an error message to stop you from allocating the two together.
How reverse charge affects your ledger accounts
Sales transactions
We record the net value of each CIS items to the CIS materials or CIS labour ledger account.
We deduct the CIS amount 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
| Ledger Account | Debit | Credit |
|---|---|---|
| Debtor Control | 140 | |
| CIS Withheld | 60 | |
| CIS Labour | 200 |
Purchase invoices
We record the net value of each CIS item to the CIS materials expense or CIS labour expense ledger account.
As we reverse the VAT, purchase invoices have two entries to the VAT on Purchases ledger account. The two VAT entries cancel each other out. After the CIS reduction, the net value of the invoice is less, reducing the amount you owe your supplier.
For example, for a purchase invoice for £100 labour with a 30% deduction rate, you owe your supplier £70.
| Ledger Account | Debit | Credit |
|---|---|---|
| Trade Creditors | 70 | |
| CIS Withheld | 30 | |
| CIS Labour Expense | 100 | |
| VAT on Purchases | 20 | |
| VAT on Purchases | 20 |
For credit notes we update your ledger accounts in the same way but in reverse.
VAT Cash Accounting
If you're using the VAT cash Accounting scheme, invoices with reverse charge show on your VAT return when you create 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 report in your box 6 figure but are excluded from the flat rate calculation.
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Purchase transactions with VAT reverse charge, are outside of the flat rate scheme. Purchase transactions with reverse charge VAT report as if you were on a standard scheme in boxes 1, 4 and 7.
