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How do I account for Partial Exemption with CIS

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Hi,

I am trying to work out how Partial Exemption should be treated with transactions that come under the reverse charge VAT for CIS.

Currently we would get clients to post any part exempt transactions to a dedicated VAT code for easy reporting then at the period end they would run a report do their calculations and post the VAT adjustment as a journal.

Will the CIS reverse VAT transaction need to also be included in the partial exemption calculation.

This is is my first question on a forum, any help would be much appreciated :) 

 

Replies (13)

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RLI
By lionofludesch
17th Jan 2022 10:01

Yes - the input tax is still input tax and needs to be dealt with just as under the old régime.

The reverse charged "output tax" needs to be paid in full.

Thanks (1)
chips_at_mattersey
By Les Howard
17th Jan 2022 14:18

As Lion says: 'The reverse charged "output tax" needs to be paid in full.' As a result, I would not expect the corresponding input tax to be subject to a Partial Exemption adjustment.

Thanks (1)
Replying to leshoward:
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By MJYousif
18th Jan 2022 13:53

Thank you both I took it that the company would be at a loss by paying the full VAT when potentially only claiming part of it if any.

So where the CIS reversal is applied then these values are excluded from the Partial Exemption and the full VAT can be claimed back resulting in no VAT being paid or receipted?

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Replying to MJYousif:
chips_at_mattersey
By Les Howard
18th Jan 2022 14:39

Where a business is recipient of CIS/DRC construction services, that same business will always be the supplier of taxable construction services, of which the CIS/DRC services form part. This is why the reverse charged input tax is always recoverable.
If the business is partially exempt as a result of other exempt activity, then the method should show CIS/DRC supplies as fully recoverable.

Thanks (1)
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By amylady
13th Apr 2022 23:31

HMRC quote "Suppliers must not enter any output tax on sales under the reverse charge. The supplier only needs to enter the net value of the sale."

https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#how-to-ac...

See also;

https://www.rossmartin.co.uk/vat/vat/4137-construction-industry-vat-reve...

So there is no Output or Input tax applicable to use in the Partial Exemption calculation, but there is the taxable supplies net value (excluding vat) relating to CIS reverse charge sales to include in your partial exemption calculation. You should also know the value splits of your Input vat according to whether your input vat is attributable to an exempt sale, a taxable sale, or to both known as residual vat, and residual vat is apportioned according to your net sales split between exempt and taxable supplies.

(Exempt Net Sales)/ (total of all Net Sales exc. vat) = exempt % to apportion

(Residual input vat * exempt % )+ exempt Input vat attributed to exempt sales = possible blocked Input vat depending on tests.

Simple example;
Company information for a quarter;
£20,000.00 exempt sales
£10,000.00 taxable sales under VAT CIS reverse charge
£40,000.00 taxable sales
£70,000 total sales

Percentage split for residual = 20,000/70,000= 29% and 50,000/70,000 = 71%

Input tax that relates exclusively to taxable supplies = £1,250
Input tax that relates exclusively to exempt supplies = £1,500
Residual input tax = £2,500
Total Input VAT = £5,250

Residual vat split
= 2500*71% = 1775 now attributed to taxable sales
=2500*29% = 725 now attributed to exempt sales

Total Input VAT now attributed to exempt sales = £725+£1,500 = £2,225.00
Total Input VAT now attributed to taxable sales = £1,775+£1,250 = £3,025

Apply the de minimis limit tests;
Exempt Input vat must not exceed £1875 per quarter = FAIL
Exempt Input vat must not exceed 50% of all Input vat = (£5,250/2)=£2,625<£2,225 PASS

If either test fails, then the Input VAT attributed (including residual apportioned) to exempt sales is blocked. This has to be re-evaluated on an annual test.

The same would also apply to purchases of services from outside the UK (reverse charge), this too would need to be included - see point 15.8 on partial exemption;
https://www.gov.uk/guidance/partial-exemption-vat-notice-706.

Hope this helps.

Thanks (0)
Replying to amylady:
RLI
By lionofludesch
14th Apr 2022 00:06

As Les said, it's almost certain that any input tax attributable to a DRC transaction would be attributable to taxable outputs and would not need to be apportioned.

I say "almost certain" but I suspect just "certain" would have done.

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Replying to lionofludesch:
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By amylady
14th Apr 2022 09:30

lionofludesch wrote:

As Les said, it's almost certain that any input tax attributable to a DRC transaction would be attributable to taxable outputs and would not need to be apportioned.

I say "almost certain" but I suspect just "certain" would have done.

As there is no input tax on a DRC transaction (no values go in box 1 or 3, only net values in box 6) there is no input vat to apportion, but the net value of the DRC transaction must be included in the partial exemption test to obtain the percentage split.

:)

Thanks (0)
Replying to amylady:
RLI
By lionofludesch
14th Apr 2022 10:05

amylady wrote:

As there is no input tax on a DRC transaction (no values go in box 1 or 3, only net values in box 6) there is no input vat to apportion, but the net value of the DRC transaction must be included in the partial exemption test to obtain the percentage split.

:)

I'm not sure I get your point here. Boxes 1, 3 and 6 are about outputs.

Thanks (0)
Replying to amylady:
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By DKB-Sheffield
14th Apr 2022 10:19

Hi Amy

Are you referring to the 'contractor', or the 'subcontrator' in the transaction? Your responses suggests the latter, yet the OP seems to be looking at the former.

FWIW, I don't agree that the net value of purchases of the 'contractor' should be used in the PE (%) calculation. It is not an output.

The input VAT is also directly attributable to an onward supply (which, as others have stated, will (almost) certainly be directly allowable), and (almost) certainly not residual.

Furthermore, you mention this is the same for overseas RC. This is, of course, similar. However, with overseas acquisitions, the RC acquisition would not count as an output for the PE (%) calculation - in the way you seem to suggest it would.

Thanks (0)
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By amylady
14th Apr 2022 14:55

Oh bother, I meant boxes 1 & 4 /facepalm.

"As there is no input tax on a DRC transaction (no values go in box 1 or 4, only net values in box 6) there is no input vat to apportion, but the net value of the DRC transaction must be included in the partial exemption test to obtain the percentage split."

The original question was

"Will the CIS reverse VAT transaction need to also be included in the partial exemption calculation."

The answer is yes.

If the company has DRC transactions, they are taxable supplies on which he is recovery purchase input vat upon, and therefore the net value of these supplies are included in the total value of net sales when calculating the partial exemption percentage.

If all the purchase input vat relates only to the taxable DRC transactions, then he can reclaim the vat. But if any of the purchase input vat relates to both exempt sales and taxable sales (including those where DRC applies), then this input vat need to be apportioned.

:)

Example;

Outputs
Exempt rated sales (exc vat) 12,000.00
standard rated sales (exc vat) 25,000.00
DRC rated sales (exc vat) 50,000.00
zero rated sales (exc vat) 5,000.00
TOTAL SALES (exc vat) 92,000.00

Inputs
Input purchase vat relating to exempt sales 6,000.00
Input purchase vat relating to taxable sales 20,000.00
Input purchase vat relating to both exempt and taxable 8,000.00
Total purchase Input VAT 34,000.00

Scenario ONE
Partial exemption calculation including DRC transitions
taxable sales 80,000.00 / total sales 92,000.00 = 87%

Input purchase VAT apportioned to taxable supplies 26,960.00
Input purchase VAT apportioned to exempt supplies 7,040.00

Scenario TWO
Partial exemption calculation excluding DRC transitions
taxable sales 30,000.00 / total sale 92,000.00 = 33%

Input purchase VAT apportioned to taxable supplies 22,640.00
Input purchase VAT apportioned to exempt supplies 11,360.00

So if you exclude the net value of DRC transactions, you will end up blocking more of your input vat if you fail the De minimis tests.

Further note on the reverse charge - not to be confused with the DRC;
"If services purchased from overseas suppliers are accounted for under the 'reverse charge' mechanism, the related input tax must be attributed to their use, not to the reverse charge declaration itself. " from HMRC partial exemption toolkit.

Thanks (0)
Replying to amylady:
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By DKB-Sheffield
14th Apr 2022 14:52

Sorry, I'm being very dense and missing the point (it's one of those days) but...

If the OP is referring to services purchased *from* a supplier (say a 'subcontractor'), which is how I read the question (and subsequent follow up questions) why is box 6 being completed at all? And why is the value of purchases being included as an 'output' for the P/E calculation? Doesn't this skew the figures?

Surely, the purchase from any supplier (normal, DRC, overseas etc ) is an input and belongs in box 7 (only)? The difference with RC being that the input AND output VAT go in boxes 1 and 4 (subject to exemption/ blocking).

The restriction on box 4 is relevant for exempt supplies. However, as stated by others, the 'onward' supply - say by the 'main' contractor - will almost) certainly be taxable - hence not blocked.

Thanks (1)
Replying to amylady:
RLI
By lionofludesch
14th Apr 2022 14:55

amylady wrote:

If all the purchase input vat relates only to the taxable DRC transactions, then he can reclaim the vat. But if any of the purchase input vat relates to both exempt sales and taxable sales (including those where DRC applies), then this input vat need to be apportioned.

I agree with that but my point was that I can't think of a scenario where it would be apportioned. It's feasible that it could relate to an exempt supply (all disallowed) though far more likely that it would relate to a taxable supply (all recoverable).

An apportionment suggests, to me, that the trader is an end user. So no DRC.

Thanks (0)
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By amylady
14th Apr 2022 15:00

Ah, I see where you are coming from.

If the company (who is performing the partial exemption test) has purchased services/goods, which is a DRC transaction, then the net purchase will appear in box 7 on the VAT return. And yes, net purchases are not used in partial exemption calculations . Only net sales, and purchase input vat is used in partial exemption tests.

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