Please enable JavaScript to view this site.

VT Transaction+

Navigation: Value Added Tax > Domestic reverse charge VAT for construction services

Purchases by contractors (if on cash accounting)

Scroll Prev Top Next More

The following information is for general guidance only and should not be taken as definitive VAT advice, since individual circumstances may vary. To determine the VAT treatment for your particular transactions please refer to HMRC guidance or seek tax advice from an accountant.

Introduction

According to HMRC VAT Notice 735: Domestic Reverse Charge Procedure (which includes construction services), para 10.8.2:

'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.'

This indicates that businesses who use the cash accounting scheme for VAT should exclude domestic reverse charge transactions from the scheme and account for them under the standard accounting method, i.e. at the time of invoice rather than payment (if different).

To do this while maintaining cash accounting for your other transactions, leave the VAT cash accounting setting ticked (Set Up>VAT) and perform the workaround below for domestic reverse charge purchases.

To enter a domestic reverse charge purchase outside of the cash accounting scheme:

Note: If you are not on cash accounting, refer to Purchases by contractors instead.

1.Create a new Expense (or Cost of Sales if appropriate) account (Setup>Accounts>All>New) and name it something like 'Domestic reverse charge services':

DRC account

Do not tick Entries analysed to this account are normally within the scope of VAT. This is to prevent the transaction from being picked up in the VAT return under cash accounting. Instead, it is accounted for in the VAT return under standard accounting by the journal in step 3.

2.Enter the purchase using a PIN (or PAY for a non-credit purchase) transaction; enter:

Total

Input VAT

Net

Net amt

Blank or 0.00

Net amt

In the Analysis of net amount section, enter:

Amount

Analysis Ledger

Analysis Account

Net amt

Expenses/Cost of Sales

The account created in step 1.

Leave Type of Purchase (for VAT purposes) as Normal.

For example, for a purchase of £100 of services:        

pin0090

3.Use the JRN transaction (or journal import function) to enter the following journal, with the same date as the purchase transaction in step 2:

Debit

Credit

Ledger

Account

Net

VAT amt


Creditors

VAT - Input

Net amt


VAT amt

Creditors

VAT - Output

0.00

For example, reverse charge VAT due of £20.00 and input VAT reclaimable of £20.00 for a net purchase of £100.00, would be entered as follows:

Dom_rev_chg_VAT_cash_ac

You should make reference to 'domestic reverse charge' in the Transaction details field, so you can identify output VAT due under the reverse charge in the Backup report of the VAT return. You should also make reference to the associated purchase transaction number, or the supplier's invoice number so you can trace the journal back to the purchase transaction.

Completing your VAT return

If you enter the journal as described in step 3. 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

Amount included (from example above)

Reverse charged output VAT

Box 1

20.00

Input VAT reclaimable

Box 4

20.00

Net amount

Box 7

100.00

Applying the CIS tax deduction

If you need to also apply the CIS deduction, follow the same steps as above, with the only differences being in step 4, where:

an additional line is entered for the CIS deduction

the value in the Total and Net fields is the VAT exclusive amount less the CIS deduction

A purchase for £100 of services with a CIS deduction of 20% should be entered as follows, using the PIN or PAY transaction:

PIN_CIS2

Screenshot showing the entry of a purchase subject to domestic reverse charge VAT and the CIS tax deduction (if on cash accounting)

The Creditors: HMRC (CIS) account needs to be created by selecting Set Up>Accounts>New. Do not tick Entries analysed to this account are normally within the scope of VAT.

HMRC (CIS)

Using this example, the VAT return will be populated with the same values shown in Completing your VAT return above.