From 1 March 2021, there will be significant changes to the way business registered for both VAT and CIS, will account for the VAT on the invoices between each other. Below are some general answers to the most common questions we have been asked:
Wasn’t this mentioned a while ago?
Yes, this was originally supposed to be introduced in October 2019 but was delayed to October 2020 and then was delayed again to 1 March 2021. It is unlikely to be delayed further.
Why is it being introduced?
To combat fraud. HMRC noticed that a number of subcontractors were registering for VAT, charging it for work done, not paying the VAT charged to HMRC and then ‘running off’ with the money.
Who is affected?
Any contractor or subcontractor in the CIS scheme who is VAT registered and does work for another VAT registered CIS contractor.
What isn’t affected by the change?
Supplies to non VAT registered customers, supply of materials only and supplies to the ‘end user’ should still be charged the relevant rate of VAT.
An example of an ‘end user’ is an office block being built, the entity that commissioned the building is generally deemed the ‘end user’, although this can vary.
What happens to services spanning the 1 March 2021?
HMRC have actually kept this quite simple, how the work is treated depends on the ‘tax point of the services’. In essence it is the earlier of:
– Date of payment
– Date of the VAT invoice
If the tax point is prior to 1 March 2021 the current rules apply, after, the new rules apply.
I am a VAT registered CIS subcontractor (supplier) invoicing a contractor (customer)…
…what is the change?
For any invoices that you raise to a VAT registered CIS contractor, you do not charge the VAT. Instead, what you would need to do is note that on the invoice ‘Reverse Charge: Customer to pay the VAT to HMRC’. This will highlight to the contractor how they need to treat the invoice.
You will also need to confirm whether your contractor is VAT registered before invoicing.
…how do I show this on a VAT return?
Any sales under the CIS reverse charge rules will be shown in box 6 as normal but no VAT will be shown in box 1.
For example, a sales invoice of £1,000 will now be shown as £1,000 in box 6 only.
…what effect will this have on my cashflow?
It differs from business to business, but if you rely on the VAT to pay for general costs, then there may be an initial shortfall as the cash you receive will likely drop by 20%. Once a VAT quarter has passed, it will likely get easier as there is a good chance, if all your income derives from VAT registered contractors, that you will start to receive a VAT refund each quarter.
If you are going to be receiving VAT refunds, it may be worth submitting monthly VAT returns to reclaim the cash quicker.
I am a VAT registered contractor (customer) receiving invoices from a VAT registered subcontractor (supplier)….
…what is the change?
When you receive an invoice from a VAT registered subcontractor with a tax point of 1 March 2021 or after, you need to account for the VAT on a reverse charge basis.
This means that you pay the net amount of the invoice to the subcontractor and in effect, add the VAT to the amount you need to pay and to the amount you claim on your VAT return.
…how do I show this on a VAT return?
On invoices from a VAT and CIS registered subcontractor, there will be two entries on the VAT return:
- The deemed output VAT on the invoice will be added to box 1 of the VAT return. Nothing is added to box 6 as it is not a sale.
- The value of the invoice will be added to box 7 as normal and the deemed amount of VAT will be added to box 4.
For example, a £1,000 purchase invoice will now be £1,000 in box 7 and the deemed VAT of £200 added to boxes 1 and 4.
…from the question above, it looks like I add the VAT and then remove it
Correct, the net effect on the VAT return is £Nil. For the legitimate traders out there, this is an extra complexity, from HMRC’s perspective, it stops the Rogue Traders running off with the VAT.
…what effect will this have on my cashflow?
It differs from business to business, but if you are the main contractor supplying the end user, it is likely your immediate cashflow will improve, but the VAT bills will be higher as you will not have any VAT to claim back from the subcontractor’s invoices.
How do I enter this on my bookkeeping software?
This will depend on what software you use. Xero, QuickBooks and Sage all have guides on this and have had plenty of time to amend the programs since it was first muted.
In Xero’s case, this involves creating new VAT rates by Accounting > Advanced > Tax Rates > Add domestic reverse charge.
We hope the above is of use and if you have any questions or would like to discuss it, please do contact us on info@mountaintopsw.co.uk.
Disclaimer
The post contains information about the VAT CIS reverse charge. Although Mountain Top Accountants Limited make every attempt to ensure the information is correct, every businesses’ affairs are different and this should not be construed as advice without taking the necessary steps to confirm what is correct in your case. Any reliance placed on this information is taken strictly at your own risk.
