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Reverse charge VAT for CIS

Flat rate scheme and Reverse charge VAT

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I have been trying to find out how to account for reverse charge VAT in the VAT return for a CIS business registered under a flat rate scheme. I attended a webinar in March this year about it and ask this question. Their answer was 'The flat rate scheme doesn't apply to supplies subject to the reverse charge'. However, I spoke with a couple of other accountants who believe that irrespective of what scheme they are, reverse charge is applicable for any VAT registered CIS business. My confusion is how the reverse charge mechanism fits in a flat rate scheme. If they charge their customer 20% VAT and the customer pays them net, what is the point of staying in a flat rate scheme? At the same time if they receive an invoice from a standard rated subcontractor, how are they going to pay that VAT to HMRC through their VAT return. There is no guidance by HMRC about this situation at all. Some advice would be greatly appreciated.

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By doubletrouble
30th Jul 2021 15:47

Did you not look at the DRC and how it interacts with CIS before?
May be worth coming off the scheme if all the sales are through CIS

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By Wanderer
30th Jul 2021 16:28

https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#flat-rate...

13. Flat rate scheme
Reverse charge supplies are not to be accounted for under the scheme. Flat Rate Scheme users who receive reverse charge supplies will have to account for the VAT due to HMRC and recover it simultaneously on the same VAT Return.

Users of the Flat Rate Scheme will have to consider if it’s still beneficial to them bearing in mind that under the scheme they cannot recover VAT incurred on purchases of materials, overheads and so on.

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Jason Croke
By Jason Croke
30th Jul 2021 16:31

https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#flat-rate...

HMRC have a (for once) really useful guide on domestic reverse charge, section 13 covers flat rate scheme. I think that'll answer your questions.

Ah, Wanderer beat me to it. Bravo Sir.

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Replying to Jason Croke:
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By sanjarkhan
30th Jul 2021 19:01

Thanks. So the supplies a flat scheme user receiving is subject to reverse charge but the supplies they are providing are not. Is that correct?

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RLI
By lionofludesch
30th Jul 2021 18:59

You should carefully consider whether the FRS is right for your client.

There's a high chance that it isn't, assuming CIS sales are the major part of his turnover.

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Replying to lionofludesch:
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By sanjarkhan
30th Jul 2021 19:09

What if the majority of the end-users are not VAT registered?

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Replying to sanjarkhan:
RLI
By lionofludesch
30th Jul 2021 19:14

sanjarkhan wrote:

What if the majority of the end-users are not VAT registered?

Why is that relevant ?

If your client is supplying end-users, they're not in the DRC. If your client is supplying contractors who supply end-users, it's nothing to do with your client.

The fact is that most end users won't be registered. They'll be Joe Public, having an extension built or a new kitchen.

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By sanjarkhan
31st Jul 2021 12:10

Sorry I am still a little confused with the interaction between FRS and DRC (and sorry to be a little dumb). Could anybody please give me a working example of a DRC sale made by a business under FRS and a DRC supply received by them. How they will be presented in the VAT return. If a CIS contractor is paying 9.5% VAT under FRS, how can they maintain this rate? I am struggling to grasp the whole concept.

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Replying to sanjarkhan:
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By legerman
31st Jul 2021 12:44

sanjarkhan wrote:

Sorry I am still a little confused with the interaction between FRS and DRC (and sorry to be a little dumb). Could anybody please give me a working example of a DRC sale made by a business under FRS and a DRC supply received by them. How they will be presented in the VAT return. If a CIS contractor is paying 9.5% VAT under FRS, how can they maintain this rate? I am struggling to grasp the whole concept.

The simple fact is you can't, so there is no real advantage to being on the flat rate scheme if the majority of their sales are CIS.

I moved a subby from FRS to standard in March and I've just completed the first full VAT return. The client has £11k sales and £1600 purchases. Under FRS he wouldn't get a penny, as DRS means there is no VAT in box 1. Under FRS he has a rebate of £230.00 Not a furtune but better than nowt.

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Replying to sanjarkhan:
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By lionofludesch
31st Jul 2021 13:29

.

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Replying to lionofludesch:
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By sanjarkhan
31st Jul 2021 14:42

Okay, thanks. However, the guidance says if the supply is to the end-user, the reverse charge does not apply. In this case, the flat rate user can still maintain their FRS rate, right?

https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#end-users...

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Replying to sanjarkhan:
RLI
By lionofludesch
31st Jul 2021 14:56

sanjarkhan wrote:

Okay, thanks. However, the guidance says if the supply is to the end-user, the reverse charge does not apply. In this case, the flat rate user can still maintain their FRS rate, right?

https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#end-users...

Is the supply to the end user or not ?

If yes, the supply isn't in the DRC.

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Replying to lionofludesch:
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By sanjarkhan
31st Jul 2021 15:05

They get work from a few estate agents, did the work and get paid by the landlord. Estate agents get a commission from them to pass the work.

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