What Are The New Domestic Reverse Charge Regulations?

The domestic reverse charge was implemented in the UK on 1st March 2021 for those working in building and construction services. The main goal of the domestic reverse charge is to tackle fraud by making sure that VAT is being reported to the HMRC correctly. For example, a cowboy builder might include VAT in his rate, but on the invoice, add extra VAT again and not hand it over to HMRC [1]. Under the new protocol, the contractor, the person who is paying for the services, will handle VAT on themselves. 

This short guide is written for sub-contractors. We cover what the domestic reverse charge is, how it works, and what services are impacted.

How does VAT Domestic Reverse Charge work? 

If you’re a sub-contractor who supplies construction services to a contractor who is VAT registered, you will no longer apply VAT to your sales invoices. Instead, when the contractor receives your invoice and they enter it as a purchase invoice in their system, they will use the reverse charge rules. According to the HMRC, this policy has been set up to combat fraud.

The contractor (customer) must inform you, the sub-contractor, whether or not they are an end-user in writing. Equally, you must attain proof that the contractor is VAT registered, and that they are subject to the CIS requirements. 

If you do not have proof that the customer meets these criteria and mistakenly apply the reverse charge for work that isn’t applicable, then you do so at their own risk. The contractor will not be obliged to pay the VAT, but HMRC will still expect you to hand it over. You are liable since it’s your responsibility to make sure that VAT is charged at the right amount.

This is because when the reverse charge applies, the VAT amount is not displayed on the invoice as something that contractors must pay. Instead, you should redirect the contractor to the HMRC, informing them that they will pay the VAT directly. You must also inform the contractor of the rate of VAT, standard or reduced, and how much VAT is required to be accounted for.

Instead of writing:

VAT @  20% £50

You’d write: 

Customer to pay VAT to HMRC. 

Vat is chargeable at 20%.

£50 is accountable on this invoice.

On your own VAT return, include the net amount of the sale in your outputs section as usual. You simply exclude the output tax section, since VAT will now be paid directly to HMRC by the contractor. 

If you were to include output tax, as you would if the sale did not adhere to the domestic reverse charge, then the HMRC would expect you to pay forward the amount indicated. Since you don’t collect VAT anymore with the charge, you have no output tax to declare. 

Who does the domestic reverse charge apply to?

The policy impacts sub-contractors in the construction industry scheme (CIS). Sub-contractors being those who offer building, construction, decoration, installation, or site preparation services for a contractor. 

The new domestic reverse charge will be applicable to you, as a sub-contractor, if:

• The supplies you make are within the construction industry scheme (CIS)
• Your products are charged at standard or reduced rate VAT
• Your customer is VAT registered
• Your customer is not an end-user

VAT should continue to be charged as usual to an end-user - the reverse charge does not apply. 

Full list of sub-contractor services impacted by the domestic reverse charge

You must use the reverse charge for the following services:

• Constructing, altering, repairing, extending, demolishing or any works forming, or planned to form, part of the land, buildings, or water, transport, or defence structures.
• 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 that form an integral part of, or are part of the preparation or completion of the services described above. This includes 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 [2].

What about mixed supplies?

Whenever the charge is applicable to part of the supplies on an invoice, then it is applied to the whole supply regardless of the labour or material content. If there are mixed supplies, that is, some of them are subject to the reverse charge and some are not, if they’re all on the same invoice, then they’re all included in the reverse charge procedure. 

For example, you could have work that is subject to the charge of £200. On the same invoice, there’s work that isn’t subject to the charge, worth £100. In this situation, the full £300 would be subject to the reverse charge [3]. 

What if I’m in the flat rate scheme?

If you’re in the flat rate scheme, and all your sales are charged at the 20% standard rate, then you might find yourself regularly making repayment claims on your VAT returns. Under the new domestic reverse charge scheme, you might find that you have significantly less, or no output tax to declare at all. 

Some accountants are recommending sub-contractors should consider exiting the flat rate scheme if they are largely impacted by the domestic reverse charge. This is because you will no longer receive output tax from your customers, or receive significantly less, but you will keep generating input tax on the purchases you make for business. This can have a very negative effect on your cash flow as a result. 

A solution to this is to do monthly tax returns instead of quarterly returns, yet this comes with its own set of challenges as it can be time-consuming [4]. 

Strong foundations

When using our point of sale systems, you have access to an extensive app store full of helpful tools. Integrate with your preferred accounting or bookkeeping apps for quick, convenient invoicing. 

• Sage One: Sage is a top online accounting software ideal for start-ups and small businesses. Over 3 million customers rely on the program for payroll, banking, and synchronizing purchases with your Epos Now system.
• Xero: Xero is an online accounting program designed specifically for small businesses. The platform handles invoices, bill payment, taxes, reporting, and more.
• Quickbooks: If you want a cloud-based, easily accessible accounting tool, look no further than Quickbooks. Their system helps minimize clutter by digitally tracking receipts and paperwork.

With Epos Now, you can also:

• Create and send invoices using simple templates and a built-in VAT calculator
• Receive and pay ongoing invoices automatically
• Review profitability reports based on individual product performance, trending items, best and worst sellers, and employee sales
• View sales analyses on profit margin, cash flow, and other expenses
• Access multi-award-winning inventory management systems that sync online sales and in-person sales for the most up-to-date stock levels
• Automate stock purchasing, so you never miss a sales opportunity
• Save customer contact details and shopping preferences for more targeted marketing on our CRM system
• Integrate with the business automation apps that are right for your business
• Simplify employee management for more efficient scheduling and payroll

Call Epos Now today to learn more about our POS accounting software integrations

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