CIS VAT Domestic Reverse Charge

Hi guys,

There’s been a lot going on in the VAT world of late but today I thought I’d focus on the new Domestic Reverse Charge that’s coming into effect from 1st March 2021. This will affect all CIS registered contractors and subcontractors who are also registered for VAT.

At the minute, if you’re a subcontractor who is VAT registered, you would send an invoice to your contractor including VAT less CIS. The VAT due from this invoice would be added in your box 1 figure and any VAT from materials or supplies would be deducted from this (box 4) which would leave you with the VAT owed as box 5.

Under the new rules, if yourself and your contractor are VAT registered, you will no longer charge VAT out. Instead, you would include the VAT rate (20%, 5%) but not include the VAT amount on the invoice. Instead you will need to include a line that says “This supply is subject to the Domestic Reverse Charge”. On your VAT return, you would just include the net sales in your box 6 as normal but nothing would go in box 1. As you are no longer collecting VAT, you may find that your VAT return becomes a repayment return (where HMRC refunds you) if all your sales are within CIS but you still pay for your own materials that you can claim VAT for.

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If you are a contractor who is also a subcontractor for another firm who is not the end user and accounting for DRC as the middle man, as the VAT rate is included in the invoice, you will be able to work out the VAT owed which would go in box 1 and also box 4. This means that the amount you have charged yourself in VAT is then reclaimed as a cost leaving a zero liability. The net purchase would go in box 7 as normal.

Bear in mind that the above does not apply to any CIS work that would be zero rated such as new builds or conversion work from non-residential to residential. If the contractor or the company you are invoicing is an end user – someone who is not intending to make ongoing supplies of construction, is not VAT registered, you will not use the Domestic Reverse Charge on these sales and will charge VAT as normal. You must keep written confirmation from any clients who are end users in case HMRC requires proof.

Useful Links – Check what falls within CIS here. View HMRC flowcharts here. Check if your client is CIS registered here. Check if your client is VAT registered here.

As always, this post is for informational purposes – for more technical information specific to your case, please contact your accountant.

Until my next post..

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