What is it?
This legislation applies to all VAT registered construction (CIS) businesses in the UK.
It has been brought in to reduce VAT fraud by moving the VAT liability from the supplier (subcontractor) of a service in the construction industry to the customer (contractor).
Exemptions
The reverse charge does not apply to the following supplies:
Supplies of VAT exempt building and construction services
Supplies that are not covered by CIS
Supplies of staff/workers
It also does not apply to supplies made to non-VAT registered customers or overseas customers.
Changes
If you are a VAT registered contractor, its your responsibility to not pay any VAT to CIS registered subcontractors. If a CIS registered subcontractor adds VAT to their bill, you’ll need them to reissue the bill without the VAT included using the reverse charge method.
If you are a VAT registered subcontractor and you provide construction services to a VAT registered contractor, you no longer account for the VAT on your invoice to them. Instead, you need to inform them that the reverse charge procedure applies on your invoice.
Xero
Add the new VAT rates.
Click on your company name at the top left of Xero & click on ‘Settings’
Click on ‘Looking for Advanced Settings’
Click on ‘Tax Rates’
Click ‘Add Domestic Reverse Charge Tax Rates’
Xero will automatically take care of your VAT entries if you use the correct rates, shown below:
Subcontractors
When raising an invoice, you need to use the ‘Domestic Reverse Charge (VAT on Income)’ tax rate.
Xero will then automatically add the following line to the invoice which is required by HMRC:
“Reverse charge applies to items marked with 'Domestic reverse charge'. Customers need to account for VAT on these items to HMRC, at the rate shown”
Contractors
When raising a bill from your subcontractors, you need to use the ‘Domestic Reverse Charge (VAT on Expenses)’ tax rate.
HMRC guidance
More detailed guidance is available on the HMRC website, click the link below:
www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services#whentouse