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VAT Domestic Reverse Charge

What is the VAT reverse charge?

 

In simpler terms the VAT Reverse charge means that customers themselves will be charging VAT, and those supplying construction services to a VAT registered customer no longer have to account for this. It applies to both standard and reduced-rate VAT supplies. It doesn’t apply to zero-rated supplies.

 

The charge has been implemented by HMRC to combat fraud. By making VAT the responsibility of the customer, the supplier has no opportunity to go ‘missing’ before paying VAT to HMRC.

 

The change has been made in order to reduce “missing trader” fraud, which is estimated to result in lost vat revenue of around £100m each year. 

 

Furthermore, Charge is effectively an extension of the Construction Industry Scheme (CIS) and applies only to transactions reported under the CIS and are between the VAT- registered contractors and sub-contractors.

 

Those supplying construction services to a VAT- registered customers no longer have to account for the VAT.

 

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Summary: 

 

1. When was the VAT reverse charge introduced?

2. Does the VAT reverse charge apply to me?

  • a. As a supplier/ Subcontractor
  • b. Subcontractors
  • c. Contractor

 

 

When was the VAT reverse charge introduced?

 

 
Initially the plans were due to come into effect as of 2019, however the charges were postponed due to BREXIT and COVID. The VAT Reverse charge is now fully affective and in place as of March 1st, 2021.
 
 
For invoices issued before 1 March 2021 the normal VAT rules will apply. For invoices issued on or after 1 March 2021 the reverse charge will apply
 
  • before 1 March 2021 and the payment date will be on or before 31 May 2021, use the normal VAT rules
  • before 1 March 2021 and the payment date will be on or after 1 June 2021, use the domestic reverse charge
  • on or after 1 March 2021, you must use the domestic reverse charge

 

 

Does the VAT reverse charge apply to me?

 

The VAT Domestic Reverse charge applies to those that are VAT- registered and are supplying or receiving services that are reported under CIS.

 

 

As a supplier/subcontractor

 

If you’re a supplier, you’ll no longer charge VAT on your ‘specified supplies’ to VAT registered customers. Due to no longer paying the VAT on some sales, they may become repayment traders, for example, claim VAT refunds from HMRC.

 

Suppliers should consider changing their VAT returns from quarterly to monthly to speed up payments due from HMRC.

 

It is possible to apply Reverse Changes to only some of your purchases and to some of your sales. And if Reverse charges do not apply, Normal VAT will be used.

 

Flow chart following hmrc guidance to help you determine if your supply complies with the vat reverse charge 

 

 

Subcontractors

 

The Reverse Charges mean little, as when you Invoice you will be passing over the VAT charge.

 

However, it may mean you will need an alteration in your accounting systems as the way you reconcile or compare customer payments against invoices, as VAT registered customers will withhold the VAT elements for them to use in regard to any CIS related supplies.

 

Noteworthy: On completing your VAT return, you must enter the value of any output tax on sales in in Box 6 not box 1

 

This process makes everything more traceable, transparent, and direct to the HMRC. So that fraudulent activity is nullified.

 

 

Contractor

 

If you are a contractor and purchase any CIS regulated services, you will need to correctly account for any Reverse Charge Invoices.

 

Any VAT due will need to be directly paid to the HMRC as part of your normal VAT settlement process.

 

This may result in a cash flow benefit because the VAT you previously paid to sub-contractors, is netted off in your VAT return. there should be NO net impact on your overall bill.

 

Noteworthy: Enter the value of such purchases (output tax) in Box 1 of the VAT return. You can reclaim the input tax in Box 4 of the VAT return. Box 7 value of purchases in the normal way.

 

The government will apply a ‘light touch’ in dealing with any errors made in the first six months of the new legislation.

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