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Domestic reverse charge VAT for construction (if on cash accounting)

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Introduction

According to HMRC, 'Businesses using the cash accounting scheme should exclude sales and purchases that the reverse charge applies to from the scheme. These supplies should be accounted for under the reverse charge provisions.'

Therefore if you normally operate VAT using the cash accounting method, you need to account for any domestic reverse charge VAT using the standard accounting method (i.e. accounting for VAT when invoiced, not paid).

Please note the information in this article is for guidance only and should not be taken as definitive VAT advice, since individual circumstances may vary. For details of obligations under the domestic reverse charge, please refer to HMRC guidance here.

Contractors purchasing services subject to reverse charge (if on cash accounting)

Note: If you are not on cash accounting, do not follow the steps below, please instead refer to Domestic reverse charge VAT for construction services

If you are on the cash accounting scheme, you will already have selected Cash Accounting in the VAT set up dialog (Set Up>VAT). Leave this setting as Cash Accounting in order to account for VAT on your normal purchases that come under this scheme. For domestic reverse charge services, you need to enter the purchase differently as follows:

1.Create a new Cost of Sales/Expense account (Setup>Accounts>All>New) and name it something like ‘Domestic reverse charge services’.

2.Although it may seem counter-intuitive, un-tick the box that says ‘Entries to this account are normally analysed within the scope of VAT’. This is to exclude the purchase from being accounted for under the cash accounting method, whilst maintaining cash accounting for your other transactions. Instead, the purchase gets picked up on the VAT return under standard accounting by entering the journal described in Step. 4.

3.Enter the purchase using a PIN or PAY transaction, but with no VAT:

Total

Net value of purchase

Input VAT

No VAT

Net

Net value of purchase

In the Analysis Account field, select the account you created in Steps 1. and 2. If you need more analysis accounts, create them from new as described in Steps 1. and 2., ensuring that they are set up as not being within the scope of VAT. Do not select any analysis accounts that are within the scope of VAT.

4.To account for the VAT, use the JRN function (or journal import funtion) to enter the following journal with the same date as the purchase transaction in Step 3. In this example, VAT is 20.00 and the net value of the purchase is 100.00. You may find it useful to reference the associated purchase transaction reference in the Entry details field.

Dom_rev_chg_VAT_cash_ac

 Screenshot of a journal entry for domestic reverse charge VAT if on cash accounting

Completing your VAT return

If you account for the purchase and VAT as described above, the VAT return will automatically be populated with the required values in the appropriate boxes as follows:

VAT return element

Included in VAT return

Entry from journal in Step 4. which populates VAT return

Reverse charged output VAT

Box 1

Line 2: Credit: VAT - Output, e.g. 20.00

Input VAT reclaimable

Box 4

Line 1: Debit: VAT - Input, e.g. 20.00

Net value of purchase

Box 7

Line 1: Net: VAT - Input. e.g. 100.00