Domestic Reverse Charge - VAT in QuickBooks Online and Desktop

A Major VAT Change comes into effect from 1st March 2021. If this affects you, we can assist you in explaining the new rules and how to deal with them through your QuickBooks program.
 
In essence, this will affect only VAT Registered construction businesses.
This will apply for Invoices issued from 1st March 2021
This applies to “Construction services and materials”
It is made at standard or reduced rate VAT.
The supplier and customer will both be registered for CIS
The customer intends to make an ongoing supply of construction services to an unconnected party.
The CIS reverse charge does not apply to taxable supplies made to the following customers:
A non-VAT registered customer.
'End Users' i.e. a VAT registered customer who is not intending to make further on-going supplies of construction.
'Intermediary suppliers' who are connected e.g. a landlord and his tenant or two companies in the same group.
  
Where the reverse rate applies, the supplier instead of invoicing for VAT in the normal way will “reverse charge” the vat to the customer. The supplier then accounts for the VAT as both an output and input vat, and thus no VAT is collected from the customer nor paid over to HMRC.
 
Where there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse, so hence where as CIS is only relevant to the labour part of an Invoice, Reverse charge VAT will be relevant to the total Invoice not just the labour element.
 
The details HMRC guidance is
https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
 
Book training for how to deal with within QuickBooks and what effect this will have on your accounting systems, and cashflows.

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VAT: domestic reverse charge for building and construction servicesby QuickBooks•120•Updated 2 hours agoThe domestic reverse charge (referred to as the reverse charge) is a major change to the way VAT is collected in the building and construction industry. It will be put into effect on 1 March, 2021.
This means that customers receiving the service will have to pay VAT due to HMRC instead of paying the supplier.
It will only apply to individuals or businesses registered for VAT in the UK (although it will not apply to consumers).
This will affect you if you supply or receive specified services that are reported under the Construction Industry Scheme (CIS).
What do contractors need to do?If you're a contractor, you'll need to review all your contracts with sub-contractors to decide if the reverse charge will apply to the services you receive under your contracts. You'll need to notify your suppliers too.
What do sub-contractors need to do?If you're a sub-contractor, you'll need to contact your customers to get confirmation from them if the reverse charge will apply, including confirming if the customer is an end-user or intermediary supplier.
How does the domestic reverse charge affect you?

HMRC understands that implementing the reverse charge may cause some difficulties. For more details on this change and to learn how it may impact your business, please visit this HMRC page.

 What does this mean?This means that customers receiving the service will have to pay VAT due to HMRC instead of paying the supplier.
It will only apply to individuals or businesses registered for VAT in the UK (although it will not apply to consumers).
This will affect you if you supply or receive specified services that are reported under the Construction Industry Scheme (CIS).
The charge applies to standard and reduced-rate VAT services:

• for individuals or businesses who are registered for VAT in the UK.
• reported within the Construction Industry Scheme.

 How can QuickBooks help me?From 1 March 2021 QuickBooks will have two new VAT codes (20% and 5%) that customers will be able to use to account for the VAT reverse charge. Once the code has been selected and the transaction is saved, QuickBooks will automatically account for the reverse charge and the VAT will be reflected on your VAT return; you do not need to amend or adjust your return.
If you are an existing customer and have enabled VAT and CIS, then you do not need to set up anything. You will only need to enable and select the VAT code to apply it to invoices or bills.
Once the VAT code has been selected and the transaction is saved, QuickBooks will automatically account for the reverse charge and the VAT will be reflected on your VAT return; you do not need to amend or adjust your return.
 Where can I find the codes and how do I activate them?The codes will be available for activation on 1 March 2021 and onwards.
First make sure VAT is setup and CIS is turned on in QuickBooks. Then go to your Taxes page and follow these steps to activate the code in QuickBooks:

1. Go to Edit VAT.
2. Select Edit Rates.
3. Select the gear icon above VAT codes.
4. Click Include Inactive.
5. Use the toggle on the codes that you want to activate in QuickBooks.

 How to the codes affect the VAT return?Excluded from the VAT Flat Rate Scheme, the domestic reverse charge should be accounted for and reported the same way as transactions under the standard VAT scheme. Reach out to your accountant to see which scheme is most beneficial for you and your business.
Here’s an example of how an invoice for £100 on the standard rate VAT should be reporting in the next VAT Return:
Transactions not under reverse charge:
Flat Rate SchemeStandard Scheme
Subcontractor
(invoice issuer)Box 1: Flat rate % applied to £120
Box 6: £120Box 1: £20
Box 6: £100
Contractor
(invoice receiver)N/ABox 4: £20
Box 7: £100Transactions under reverse charge:
Flat Rate SchemeStandard Scheme
Subcontractor
(invoice issuer)Box 6: £100Box 6: £100
Contractor
(invoice receiver)Box 1: £20
Box 4: £20
Box 7: £100Box 1: £20
Box 4: £20
Box 7: £100

 What do I need to add to my invoices?For invoices and other VAT documents, you need to include the following:

• Show all the information required on a VAT invoice (for example, VAT Registration Number, the date of service supplied and total amount due).
• Make a note on the invoice that clearly states the domestic reverse charge applies and that the customer is required to account for the VAT due.
• Clearly state the exact amount of VAT due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but the VAT should not be included in the amount charged to the customer.
• Invoices for services subject to the reverse charge must include the reference ‘reverse charge’ according to the VAT regulations 1995.

Here are some examples of approved references that you can use:

• VAT Act 1994 Section 55A applies
• S55A VATA 94 applies
• Customer to pay the VAT to HMRC

 What about credit notes and adjustments?If you need to adjust the amount of VAT due, you can do so by reducing the total VAT due in the VAT Return for the period in which the credit note was issued.
Then adjust the amount of input VAT (this is VAT which is included in the price when you purchase VATable goods or services for your business) in the same VAT return in accordance with any input tax adjustment calculations that apply.
Remember to include the reduction in the value of the supply in the VAT Return for the period in which the credit note is issued.
Note: If the original supply was accounted for under a self-billing or authenticated receipts system then it will be for the customer rather than the supplier to generate the credit note, but otherwise the same procedure will apply.


 What happens if I have not submitted my VAT Return?If you notice a change in the amount of reverse charge services before the end of your accounting period, you can change your primary records of the sale (or purchase) and make sure the correct figure appears in the VAT account.
For those with credit notes spanning the transition period, check out section 15 on the HMRC website for more details.
 Do I need to pay additional charges to use CIS reverse charge for CIS in QuickBooks?No, there are no additional charges. Learn more about QuickBooks and the plans we offer. 
 What if my construction project begins before the reverse charge but ends after it comes in?It will depend upon when the tax point is. In most cases, this will be the date of issue of the VAT Invoice, or the receipt of payment – whichever occurs first.
“Time of Supply” rules apply for prepayment. If a prepayment was made then it will be the date that the supplier received payment, and if there is no invoice or the invoice was issued 15 or more days before the work is finished then it will be the date that the work was finished.
If the tax point is on or after 1 March 2021 then the reverse charge should be applied. If the tax point is before that date, current VAT rules apply.
 What VAT rates does the reverse charge for construction services apply to?It applies to both standard and reduced-rate VAT supplies. It doesn’t apply to zero-rated supplies.
 What do I do if the VAT reverse charge for construction services doesn’t apply to the services I provide?Normal VAT rules will apply, which is to say, you should invoice for the VAT and account for it in your VAT return.
 What construction services does the VAT reverse charge apply to?

According to HMRC, you must use the reverse charge for the following services:

• Constructing, altering, repairing, extending, demolition or dismantling buildings or structures (whether permanent or not), including offshore installation services.
• Constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence.
• Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure.
• Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration.
• Painting or decorating the inside or the external surfaces of any building or structure.
• Services which form an integral part of, or are part of the preparation or completion of the services described above - including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

 What is exempt from the VAT reverse charge for construction services?Do not use the charge for the following services, when supplied on their own:

• Drilling for, or extracting, oil or natural gas.
• Extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose.
• Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site.
• Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site.
• The professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants.
• Making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements.
• Installing seating, blinds and shutters.
• Installing security systems, including burglar alarms, closed circuit television and public address systems.

 Does the VAT reverse charge for construction services apply to work provided for home/domestic individuals?No. It only applies to VAT registered businesses registered for the CIS.
If the services are provided for non-VAT-registered individuals or other kinds of ordinary non-business individuals then standard VAT rules apply.
 Is Making Tax Digital for VAT affected by the VAT reverse charge for construction?Making Tax Digital (MTD) only changes how businesses submit their VAT returns and how VAT is accounted for – both of which must be done digitally using functional compatible software and hence it has no direct impact on the VAT reverse charge other than the fact any reverse charges must be recorded digitally, along with the rest of your VAT.

Domestic Reverse Charge - VAT in QuickBooks Desktop Pro and Premier and Accountant

 
VAT Domestic Reverse Charge (DRC) for CIS in QuickBooks Desktop
by QuickBooks•3•Updated 23 hours ago
The domestic reverse charge (which comes into effect on 1 March 2021) is a major change to the way VAT is collected for certain kinds of construction services in the UK, along with any building and construction materials used directly in those services. However, it doesn’t apply to building and construction materials supplied separately, and independently, of any construction services. 
The VAT reverse charge for construction is effectively an extension of the Construction Industry Scheme (CIS), and applies only to transactions that are reported under the CIS and are between VAT-registered contractors and sub-contractors.
To simplify this even further, for services a subcontractor provides they will require the contractor employing them to handle and pay the VAT directly to HMRC.
The payment received will be for the cost of the work done (plus materials used), net of any CIS deductions for tax and National Insurance but no VAT will be paid on the invoice.

What does this mean?
 
This means that customers receiving the service will have to pay VAT due to HMRC instead of paying the supplier. It will only apply to individuals or businesses registered for VAT in the UK (although it will not apply to consumers).
This will affect you if you supply or receive specified services that are reported under the Construction Industry Scheme (CIS).The charge applies to standard and reduced-rate VAT services:

• for individuals or businesses who are registered for VAT in the UK.
• reported within the Construction Industry Scheme.

I’m a contractor, what do I need to do?
 

I’m a subcontractor, what do I need to do?
 

How do the codes affect the VAT Return?
 
Excluded from the VAT Flat Rate Scheme, the domestic reverse charge should be accounted for and reported the same way as transactions under the standard VAT scheme. Reach out to your accountant to see which scheme is most beneficial for you and your business. 
Here’s an example of how an invoice for £100 on the standard rate VAT should be reporting in the next VAT Return:
Transactions not under reverse charge
Flat Rate Scheme
Standard Scheme

Subcontractor
(invoice issuer)
Box 1: Flat rate % applied to £120
Box 6: £120
Box 1: £20
Box 6: £100

Contractor
(invoice receiver)
N/A
Box 4: £20
Box 7: £100

Transaction under reverse charge
Flat Rate Scheme
Standard Scheme

Subcontractor
(invoice issuer)
Box 6: £100
Box 6: £100

Contractor
(invoice receiver)
Box 1: £20
Box 4: £20
Box 7: £100
Box 1: £20
Box 4: £20
Box 7: £100

What about credit notes and adjustments?
 

What if I have not submitted my VAT Return?
 
Create the 20% code
CIS Reverse charge for sales item:

1. Go to Lists, right click Item List and select New.
2. Select VAT Item from the TYPE list.
3. Enter Reverse Charge CIS Sales in the VAT item Name field.
4. Enter 0.00% in the VAT Rate (%) or Amt field.
5. Choose HMRC VAT as the VAT agency.
6. For VAT Return Box, choose '<N, 6> None, Net Reverse Charge Sales' from the dropdown menu list.
7. Click OK to save.

CIS Reverse charge for Purchase Standard item:

1. Go to Lists, right click Item List and select New.
2. Choose VAT Item from the TYPE list.
3. Enter CIS RC Purchase Standard in the VAT item Name field.
4. Enter -20.0% in the VAT Rate (%) or Amt field.
5. Choose HMRC VAT as the VAT agency.
6. For VAT Return Box, choose '<1, N> VAT on Sales, None' from the dropdown menu list.
7. Click OK to save.

CIS Reverse charge for Purchase Standard group:

1. Go to Lists, right click Item List and select New.
2. Choose VAT Group from the TYPE list.
3. Enter CIS RC Purchase Standard Group in the Group Name/Number field.
4. Select VAT Items in the table and then select OK. Standard Purchases and CIS Purchases Standard.

Reverse charge CIS Standard code:

1. Go to Lists, and choose VAT Code List.
2. Right click on the page and select New.
3. Enter CRS in the VAT Code field.
4. Enter CIS RC Standard in the Description box.
5. Using the radio button, choose Taxabale.
6. For VAT Item for Purchases, choose CIS RC Purchase Standard group.
7. For VAT Item for Sales, choose Reverse Charge CIS Sales item.
8. Click OK to save.

To create 5% code
Reverse charge CIS 5% Purchase item:

1. Go to Lists, right click Item List and select New.
2. Select VAT Item from the TYPE list.
3. Enter Reverse Charge CIS 5% Purchases in the VAT item Name field.
4. Enter -5.0% in the VAT Rate (%) or Amt field.
5. Choose HMRC VAT as the VAT agency.
6. For VAT Return Box, choose '<1, N> VAT on Sales, None' from the dropdown menu list.
7. Click OK to save.

Reverse charge CIS 5% Purchases group:

1. Go to Lists, right click Item List and select New.
2. Choose VAT Group from the TYPE list.
3. Enter CIS RC Purchases 5% Group in the Group Name/Number field.
4. Select VAT Items in the table and then select OK. Reduced Purchases and Reverse Charge CIS 5% Purchases.

Reverse charge CIS 5% code:

1. Go to Lists, and choose VAT Code List.
2. Right click on the page and select New.
3. Enter CR5 on the VAT Code field.
4. Enter CIS RC 5% in the Description field.
5. Using the radio button, select Taxable.
6. For VAT Item for Purchases, choose CIS RC Purchases 5% Group.
7. For VAT Item for Sales, choose Reverse Charge CIS Sales item.
8. Click OK to save.

Add notes to sales invoice
When supplying a service that is subject to the domestic reverse charge, you must clearly state the reverse charge on the invoice and other VAT documents. Here are some details to include:

• Show all the information required on a VAT invoice (for example, the VAT Registration Number, date and the total amount including VAT). 
• Make a note on the invoice that clearly states the domestic reverse charge applies and that the customer is required to account for the VAT due.
• Clearly state the exact amount of VAT due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but the VAT should not be included in the amount charged to the customer. 
• Invoices for services subject to the reverse charge must include the reference ‘reverse charge’ according to the VAT regulations 1995. 

Here are some examples of approved references that you can use:

• VAT Act 1994 Section 55A applies 
• S55A VATA 94 applies 
• Customer to pay the VAT to HMRC

Note: You can also make a note in the Customer Message box of any VAT that is applicable but not necessarily applied under the VAT domestic charge.
 
https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#invoices

Above details from Intuit QuickBooks copyright.

HMRC Full guidance

​https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services

For Training,in Domestic Reverse Charge in Quickbooks Help advice and set up contact us