What is Reverse VAT
Since when does Reverse VAT apply?
The Construction Industry VAT Reverse charge applies from 1 March 2021. The new rules mean customers account for the suppliers output VAT where domestic VAT reverse charge applies. It applies to construction supplies made from one business to another business, that fall under CIS. It means the customer will no longer pay VAT on CIS supplies to the supplier but will stop the VAT and pay it directly to HMRC.
When to apply the Reverse VAT charge?
You apply the CIS reverse vat charge when:
- The vat able supplies are for construction services and materials.
- The supplies are standard rated or reduced rated for VAT.
- Both Supplier and Customer are CIS registered.
- Both Supplier and Customer are UK VAT registered businesses.
- Your customer is not the end user or Intermediary supplier business, but instead will make further supplies to a 3rd party.
- The supplier and customer or not connected (eg. landlord and tenant or connected businesses)
How are invoices with Reverse VAT raised?
Even if only a small part of the suppliers’ invoice is relevant to reverse charge, the entire invoice will be subject to reverse charge VAT.
The supplier will not add vat on their invoice but will need to use the wording: “Reverse Charge: Customer to pay the VAT to HMRC” and show the relevant VAT or the relevant VAT rate within the note.
NOTE!!! For guidance, you can have a look at the GOV UK site. There you can find examples, as the one listed below, of how the Invoice with Reverse VAT / Reverse Charge should look like!
When the Reverse VAT does not apply?
The VAT reverse charge will not apply if the supplier and the customer are linked or connected in some way. It also won’t apply if the work or supplies are not covered by the CIS, or are not subject to VAT at all.
NOTE!!! For further information/guidance on the Reverse VAT Charge, we recommend you to check the GOV UK site and their technical guide on the subject!
Where can we find the Reverse VAT in Archdesk
Where is the Reverse VAT data stored? How can I check if I have it?
In order to see if you have the correct settings in Archdesk, you will have to go to the drop-down with your name > Settings and Preferences > (Company Settings) Financials > (Other Settings) % Taxes.
There you should be able to see the 4 "Domestic Reverse Charge" taxes, as in the picture below:
What to do if the 4 taxes are not there?
You can always add them manually by clicking on the CREATE NEW TAX button under the same location. A pop-up window will appear, with only 2 lines:
Name - here you will add the names as per the list below
Rate (%) - in this case, the percentage will always be 0%
The 4 taxes are:
- Domestic Reverse Charge @ 20% (VAT on Expenses)
- Domestic Reverse Charge @ 20% (VAT on Income)
- Domestic Reverse Charge @ 5% (VAT on Expenses)
- Domestic Reverse Charge @ 5% (VAT on Income)
How does the Reverse VAT data transfer to the Accounting Software you use?
It is crucial that inside the Accounting System/Software that you are using you must have the Reverse VAT turned on!
Archdesk provides a smooth one-way connection with Xero and Quickbooks, based on:
1) Nominal Codes - that you are using and that must be also setup inside Archdesk (Please see also the Knowledge Item on "How to Add Nominal Codes")
2) VAT levels - that you are using and that must be also setup inside Archdesk (Please see the point above: "Where is the Reverse VAT data stored? How can I check if I have it?")
3) The Business Contacts - setup in the system (Please see also the Knowledge Item on "How to add a new Business or Individual Contact in Archdesk")
When the connection between Archdesk and the Accounting System is activated, you will have a pop-up with the VAT levels and the Nominal Codes. They will need to be matched up.
NOTE!!! You should see it as a warning sign in the case where you see data missing at this match. In this case, please contact firstname.lastname@example.org immediately!
Once the VAT levels and the Nominal Codes are matched, they will be remembered throughout. Also, the Accounting Software connection is kept open so the invoice flow should be automatic.