What is the domestic reverse charge?
The domestic reverse charge is a new procedure being implemented in the UK from March 1st 2021 for construction services. Under the domestic reverse charge procedure, the buyer (contractor) accounts for the VAT rather than the supplier (subcontractor).
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The domestic reverse charge was created as an addition to the existing Construction Industry Scheme (CIS) to ensure that VAT is being reported correctly by workers in the construction sector.
Before March 1st 2021, the supplier would account for the VAT. From March 1st onwards, the buyer will account for the VAT on their VAT Return, and the supplier will need to issue a reverse charge invoice.
Who is affected by the domestic reverse charge procedure?
Most contractors and subcontractors who are registered for VAT in the UK, and also registered for the Construction Industry Scheme will be affected by the domestic reverse charge.
The reverse charge only applies to sales between VAT registered businesses. If you supply services to end-users (e.g. homeowners), or one party involved in the sale is not registered for VAT, then the reverse charge will not apply.
The domestic reverse charge only applies to specific construction services. Therefore, some of your sales may include the reverse charge and others will not. We will outline which services are included and excluded below.
What services need to include the reverse charge?
The majority of services reported under the Construction Industry Scheme will need to apply the reverse charge. This only applies to standard or reduced-rate services. Zero-rated construction services will not apply.
Some services that must apply the reverse charge are:
- Demolition, construction, or repairs to structures or land
- Installation of utility systems (e.g. heating, water, power, etc.)
- Cleaning or decorating a building during construction
- Other services that are required to complete the aforementioned services
A full list of included and excluded services can be found on the UK Government website.
Which services are excluded from the domestic reverse charge
If your services are not covered under the Construction Industry Scheme, you will not need to apply the domestic reverse charge. Some excluded services are:
- The work of architects, surveyors, landscapers, and decorators
- Manufacturing parts for construction (e.g. machinery, utility systems, etc.)
- Installing security systems or artwork
- Drilling or extraction
If you are in doubt about whether you need to apply the reverse charge to your sales, you should contact HMRC or a qualified accountant.
How to create a domestic reverse charge invoice
If your work falls within the scope of the domestic reverse charge, you will need to create specialised invoices for your sales. A domestic reverse charge invoice should include all of the mandatory fields found on a VAT invoice. This includes your business information and the customer’s information, an invoice number, a description of the services, and a breakdown of the VAT due.
In addition to the standard details found on a VAT invoice, you will also need to include the CIS deduction if required for the sale. This is a percentage of the total that is deducted from the sale and transferred to HMRC for tax purposes. The CIS deduction is normally included in the breakdown of the price at the bottom of the invoice, below the subtotal, but above the total amount due.
The final piece of information you will need to include on the invoice is a label stating “Reverse charge”. If possible, this should be included within the breakdown of the sale amounts at the bottom. If that is not possible, then you can simply apply the 0% VAT rate, and include a reference on the invoice as follows:
Domestic reverse charge: Customer to pay the VAT to HMRC. VAT due: £XX.XX.
Example of a domestic reverse charge invoice
Below, we have provided a sample CIS reverse charge invoice created with Debitoor invoicing software. As you can see, the 0% VAT rate is applied, as well as the CIS deduction and reverse charge note.
Domestic reverse charge on your VAT return
If you are VAT registered, you need to submit VAT Returns to HMRC on a monthly or quarterly basis. This will include any VAT you have paid from purchases and any VAT you and claimed from sales. Domestic reverse charge sales and purchases will be input differently on your VAT Return than standard sales and purchases.
If you apply the domestic reverse charge to your sales invoices, this will only need to be inputted in box 6 of your VAT Return (value of sales excluding VAT). You do not need to enter anything in box 1 as this will be the buyer’s responsibility.
If you purchase domestic reverse charge services as a contractor, you will enter the output tax in box 1, but will not enter anything in box 6. You should also enter input tax on reverse charge purchases in box 4 and the VAT exclusive value in box 7, as you normally would for standard transactions.
As always, you should speak to a qualified accountant if you need assistance with your VAT Return.