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VAT: Basic guide to the reverse charge

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Neil Warren explains exactly how the VAT accounting will work for the domestic reverse charge on construction services, which is due to take effect on 1 October 2019.

3rd Sep 2019
Independent VAT Consultant
Columnist
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A senior partner at a medium-sized accountancy firm admitted to me last week that he couldn’t grasp how the reverse charge for VAT works in practice.

It has not been particularly important for his day-to-day work in the past, but the new rules for the construction industry taking effect on 1 October will definitely change that. He needs to get a grip on what is happening.

Below is a worked example that I used to explain the charge:

A typical construction transaction which will be caught after 1 October is as follows: Subcontractor Steve has done £2,000 of decorating work (including materials) for Contractor Clive – the latter will invoice the building owner for the project in question. Steve’s work is captured by the new rules because it is a builder-to-builder supply.

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Replies (15)

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By marcovercelli
04th Sep 2019 10:30

Does the reverse charge apply just to firm under the CIS rules?

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Replying to marcovercelli:
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By johnjenkins
04th Sep 2019 10:44

Yes

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By johnjenkins
04th Sep 2019 10:47

Good article Neil. A bit more advice would be that those subbies on the flat rate scheme who turn over under £85k need to think about de-registering, which is what I think reverse charge is partly about.

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By m14s4k
04th Sep 2019 11:11

Excellent summary thank you. Presumably if Steve makes an error in his bill to Clive then Clive should process the bill with whatever incorrect VAT rate is applied in Steve's bill?

Also under CIS payroll processing, the CIS deduction would apply to labour excluding materials, but VAT will now not be added back to the net payment to the subbie because RC will apply to the whole subbie invoice including materials. Is that right?

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Replying to m14s4k:
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By rmillaree
04th Sep 2019 12:40

"Presumably if Steve makes an error in his bill to Clive then Clive should process the bill with whatever incorrect VAT rate is applied in Steve's bill?"

I would have presumed exactly the opposite, albeit there is i think specific leeway given for those getting up to speed making a genuine error.

As ever the vat officers will be forced into addressing knowingly wrong vat treatment i would again presume - so any wrong treatment is likely to be an issue and that's the problem here working out whether the reverse charge deffo applies or not and even if it doesn't the vat rate may also be up for grabs too. At its most simplistic if Steve Bills clive vat in error and clive pays and claims back that vat that's the worst possible scenario for clive as output vat has been understated and steve owes him money back to cover that understated output vat and steve may not be around to pay it back at a later date.

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By Lisaskinniehorse
04th Sep 2019 13:20

I have read recently that businesses will no longer be able to use the Cash Accounting Scheme under the DRC and will have to migrate to invoice-based VAT accounting. Is this true?

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Replying to Lisaskinniehorse:
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By rmillaree
04th Sep 2019 15:08

"I have read recently that businesses will no longer be able to use the Cash Accounting Scheme under the DRC and will have to migrate to invoice-based VAT accounting. Is this true?"
Do you have a link to where you read that?

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Replying to rmillaree:
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By EJonesFM
04th Sep 2019 19:52

I believe this comes from the GOV explanation here under the Cash Accounting sub-heading : https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and...

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Replying to EJonesFM:
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By Lisaskinniehorse
04th Sep 2019 20:02

It was mentioned in the Tax Adviser Magazine (September issue) on the ATT Welcome page 'Sandy feet a distant memory'.

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By EASTIE
04th Sep 2019 19:19

Staying on cashflow, a point to consider for clients on standard quarterly reporting is moving them to monthly returns as they may move from a net payment to a net repayment position

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By Melissa123
06th Sep 2019 16:09

HMRC have postponed it until next year!!

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By AndrewV12
25th Sep 2019 11:07

More bloody agro. I think its about time HMRC raised the Vat threshold to £120,000 but still give an option for Voluntary registration.

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Replying to AndrewV12:
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By johnjenkins
25th Sep 2019 12:28

Wouldn't it be better if all business were VAT registered but no money changed hands between them.

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By Sezza
31st Jan 2020 16:37

Hi

Could you please confirm the following scenario:

I have purchased individual S/H goods totalling over £5000.00 which have been invoiced on reverse vat. I have returned only one of the items totalling £25.00 to my supplier who has issued a credit note on standard vat.... is this correct?

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By klambert
11th Feb 2020 14:54

I need some information on how to deal with an invoice from Microsoft in Ireland that has 20% reverse charge VAT.

They originally issued the invoices with 20% VAT, I advised them that we were a UK VAT Registered customer and VAT was not applicable. They could not re-issue the invoices without the VAT element but amended the invoices to show that the 20% VAT was reverse charge VAT.

I paid Microsoft the full value of the invoices including the 20% “reverse charge” VAT- which I now think was incorrect

Are you able to clarify if I should have paid Microsoft the net value? I then assume I should be responsible for paying the HMRC the VAT element via my VAT return.

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