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CIS Subcontractors and the VAT Flat Rate Scheme

Turnover and the DRC

Didn't find your answer?

Just waiting for the flood of phone calls.  I sent letters out yesterday to my VAT registered contractor and subcontractor clients about the new Domestic Reverse Charge arrangements ...... doubtless there'll be a fair number of Whisky Tango Foxtrot calls in the next couple of days.   Maybe I should've sent them out over a couple of weeks.

Anyway - has anyone deciphered what counts as turnover for the Flat Rate Scheme?   If the work done is, say. £1000, do we apply the percentage to £1000 or £1200?

Replies (14)

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By pauld
26th Jun 2019 12:02

that's an interesting one, surely no VAT due as contractor they work for will be paying the VAT.

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By fiona_howells
26th Jun 2019 12:22

Flat Rate Scheme

Reverse charge supplies are not to be accounted for under the scheme. Therefore, users of the scheme will have to consider if it is still beneficial to them when VAT is not being paid to them on some or all of the invoices they issue.

Flat Rate Scheme users who receive reverse charge supplies will have to account for the VAT due to HMRC.

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Replying to fiona_howells:
chips_at_mattersey
By Les Howard
26th Jun 2019 14:20

HMRC advice is that contractors using the domestic Reverse Charge should leave the FRS. I agree with them.

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Hallerud at Easter
By DJKL
26th Jun 2019 12:34

ICPA podcast yesterday- whilst there was not a one size fits all answer, the thrust of the discussion was to probably get those on flat rate schemes back to standard vat (not that I paid that much attention to that bit I was more interested in what we had to do when instructing works)

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RLI
By lionofludesch
26th Jun 2019 14:44

If "Reverse charge supplies are not to be accounted for under the scheme", why would they need to drop out of the FRS ?

Also, can we all just remember that CIS supplies might not be 100% of the total supplies by a subcontractor and keep an open mind here ?

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Replying to lionofludesch:
Hallerud at Easter
By DJKL
26th Jun 2019 15:31

It appears to be more re those who receive domestic reverse charge supplies who are on flat rate scheme where the issue of non recovery of the input tax but full liability for the output tax can arise- in effect mid chain contractors on FRS are the ones with a potential financial headache .

Whilst the RC supplies are not part of their turnover for FRS purposes they do still need to account for the full output tax but with no ability (as FRS registered) to reclaim the input tax re the RC supplies.

However I may well have got this wrong but I believe that is the issue.

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Replying to DJKL:
RLI
By lionofludesch
26th Jun 2019 15:47

DJKL wrote:

It appears to be more re those who receive domestic reverse charge supplies who are on flat rate scheme where the issue of non recovery of the input tax but full liability for the output tax can arise- in effect mid chain contractors on FRS are the ones with a potential financial headache .

I don't see that their position has changed.

Instead of paying Joe Builder (say) £1200, they're paying Joe Builder £1000 and HMRC £200 DRC. If they're on FRS, they're not recovering input tax either way, unless it qualifies under capital expenditure rules.

However, I was thinking of the subcontractor's position.

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Replying to lionofludesch:
Hallerud at Easter
By DJKL
26th Jun 2019 16:55

It is more possibly opportunity cost than worse off than now, but does depend upon level of sub contract purchases relative to sales- it is not, as far as I can see, a one size fits all.

Doing a back on an envelope calc on excel ,on a 14.5% flat rate scheme, purchases of materials/reverse charge sub cons over 12.7% of net sales value seems to be the tipping point.

If sales £2,000 plus vat, purchases via DRC £254, that gives funds kept on 14.5% flat rate scheme of circa £1,747, £254 being 12.7% of net sales.

Under standard model same numbers same result.

As the percentage purchases to net sales exceeds over 12.7% seems to be better in standard model.

( I would check these , whilst I think the excel model is correct not definite)

Also note for a 9.5% builder the tipping point is circa 42% costs as a percentage of sales.

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Replying to DJKL:
RLI
By lionofludesch
27th Jun 2019 09:25

OK - I'll be clearer.

This is for a builder who does the odd bit of work for a CIS contractor but mostly deals with Joe Public.

I accept that I need to look at the numbers - which is why I'm asking what to include as sales.

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7om
By Tom 7000
01st Jul 2019 16:35

Is it not

I used to charge 1000+200 = 1200 and pay 9% = 108 keeping 92 for myself and no purchase recovery. and I had 1092

Under reverse charge is it

1000x9 % = 90 and I have 1000-60 = 910

So get out of FRS asap

As an aside in the old days ( pre div tax and low cost traders) if you had a husband and wife small builder ltd with just over the limit on materials so not labour only on FRS and you cracked the taxes out. The CT that they paid was less than the vat recovery and you could actually run a business with negative taxes...

The clients loved that one... all gone now though...

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Replying to Tom 7000:
RLI
By lionofludesch
01st Jul 2019 16:48

Tom 7000 wrote:

Under reverse charge is it

1000x9 % = 90 and I have 1000-60 = 910

Dunno. That's what I'm trying to find out. I can't find it mentioned anywhere in the VAT notice.

For what it's worth, I would've thought so.

Get out of FRS straight away ? Sure - if all the trader's income is CIS. I'd worked that out.

But what if it isn't ? What if it's only a tiny part of his turnover ?

FRS might still be beneficial. Just not as good as it was.

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Replying to Tom 7000:
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By johnhemming
01st Jul 2019 19:09

My understanding is that there is no profit to be made on vat discounted supplies and a loss on unrecoverable input tax.

Flat rate scheme now
Invoice 1200 vat payable 9% 108
Materials 300 no vat recoverable
vat paid 108
profit 792

Standard vat now
Invoice 1200 vat payable 20% 200
Materials 300 £50 vat recoverable.
vat paid 150
profit 750

DRC with flat rate
receives 1000 (reverse charges supplies)
materials 300 no vat recoverable
profit 700

DRC standard vat
receives 1000 (reverse charge supplies)
materials 300 £50 recoverable
profit £750

Obviously all the figures would vary depending upon the proportions and if someone does a lot of work for the public then the balance can shift.

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Replying to johnhemming:
7om
By Tom 7000
01st Jul 2019 20:56

Your understanding. Or you know exactly?
No guessing......

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Replying to Tom 7000:
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By johnhemming
01st Jul 2019 21:19

E&OE

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