Domestic Reverse Charge 2: Sales invoices and VAT returns
Neil Warren sets out simple steps to getting invoices, credit notes and VAT returns right, when applying the domestic reverse charge in the construction industry.
A challenge with the new domestic reverse charge rules being introduced into the construction industry on 1 March 2021 is not to over-complicate the accounting issues.
All that is happening is that VAT is not being charged by a supplier on a qualifying job subject to 5% or 20% VAT, and the customer includes the VAT in box 1 of their own return instead.
Plumber Pete is doing work for Contractor Ltd which is subject to the new reverse charge rules. The value of the work is £10,000 plus 20% VAT.
Pete will invoice the company for £10,000 with no VAT, and record the sale as an output in box 6 of his next VAT return. If he uses the cash accounting scheme, the box 6 entry will be based on the payment date rather than invoice date.
Contractor Ltd includes £2,000 in box 1 on its VAT return as output tax. The company can claim the same amount as input tax in box 4 because the VAT relates to the company’s taxable supplies; ie, there are no exempt, private or non-business apportionments. The payment of £10,000 is included in box 7, the inputs box.
Contractor Ltd will apply the reverse charge according to the invoice or payment date, whichever happens first (usually the invoice date), even if it uses the cash accounting scheme.
Pete must include two pieces of information on all the invoices that are subject to the reverse charge:
- A note to confirm that his customer must deal with the VAT, along the lines of: “Reverse charge: Customer to pay the VAT to HMRC”
- Either the amount of VAT that the customer will declare as the reverse charge (£2,000), or at least the rate of VAT for the work in question (20% in this case).
I know that some builders are planning to quote the legislation on their invoices, eg, “No VAT charged – s55A, VATA 1994 applies”. I think it is simpler to leave out this reference and include more practical wording as above. It also makes sense to include the customer’s VAT and CIS numbers on each invoice.
Multiple VAT rates
My suggestion is that the exact amount of VAT subject to the reverse charge should be included on sales invoices rather than just the rate that applies to the job, but either approach is fine.
If an invoice includes work that is subject to both 5% and 20% VAT, then showing the VAT rate applicable may be better. There is a good example of a mixed rate invoice in section 14 of HMRC’s reverse charge guidance.
Don’t forget that the reverse charge also applies to materials supplied by a builder as part of his work.
If a builder supplies labour and materials, and does a lot of reverse charge work, it might be worth reverting to monthly VAT returns, to accelerate input tax claims on buying materials. But this would mean submitting 12 VAT returns rather than four VAT returns each year, a greater administrative burden.
Credit notes for reverse charge work
There are two ways of dealing with credit notes:
If both a supplier and customer are registered for VAT, and the customer has no input tax restrictions, the credit can be raised without the customer adjusting the VAT if both parties agree (see VAT Notice 700, para 18.2.1)
Alternatively, the credit note raised by the supplier can include a note to adjust the VAT; ie, reductions in the figures in boxes 1, 4 and 7 of the customer’s next VAT return in accordance with the principles of the reverse charge.
Don’t forget that the new reverse charge rules do not apply in two important situations:
- Zero-rated supplies – eg, work on new dwellings
- Employment business – these businesses are supplying staff rather than construction services, so all of their sales are subject to normal VAT rules.