Domestic VAT Reverse Charge for Construction Industry

Article ID: 2025248                      Last updated:  22 March 2021

 

Note:  This support note is for use with AccountEdge 2021 or later.

If you are using AccountEdge 2020 or earlier, please see the article linked here.

 

From 1 March 2021 the domestic VAT reverse charge must be used for most supplies of building and construction services.

The charge applies to standard and reduced-rate VAT services:

  • for individuals or businesses who are registered for VAT in the UK
  • reported within the Construction Industry Scheme

 

We recommend that you review the relevant UK government documentation regarding how domestic VAT reverse charge may affect your business:

  • We recommend you contact HMRC for any accounting or VAT treatment clarifications you require.

 

Domestic VAT Reverse Charge in AccountEdge

Setting up and recording domestic VAT reverse charge transactions in AccountEdge is straightforward.

Purchases requiring domestic VAT reverse charge are handled differently to Sales, both of which are explained below:

 

Purchase Transactions

You will need to create and use a new VAT Code for domestic VAT reverse charges that affects boxes 1, 4 and 7.

To create a new VAT Code:

•  In AccountEdge, at the top of your screen select Lists> VAT Codes.

•  The VAT Code List will appear.  Click New.

VAT Code List

•  Enter a VAT Code reference, for example 'REVC' or similar.

•  Enter a Description such as 'Domestic VAT Reverse Charge Purchase of Construction Services' or similar.

•  Set the VAT Type to 'Domestic Reverse Charge'.

•  Set the Reported Rate on VAT Return to the standard rate, currently 20%.

•  Set the Linked Account for VAT Collected and VAT Paid to your VAT Due liability account (2-xxxx).

•  Linked Card for VAT Authority is not a mandatory field.

Domestic VAT Reverse Charge

• Click OK to close the VAT Code Information window.

 

Recording Purchases

When recording purchases requiring domestic VAT reverse charge, simply use your new VAT Code on the relevant lines of the transaction.

 

Sales Transactions

UK government rules state that when supplying a service subject to the domestic reverse charge, suppliers must:

  • show all the information required on a VAT invoice
  • make a note on the invoice to make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT
  • clearly state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but the VAT should not be included in the amount charged to the customer

Complying to sales invoice rules in AccountEdge

In AccountEdge, when domestic VAT reverse charge reporting applies to a sale, you will need to record each line of the sale with a zero rate VAT code.

We recommend that you create a new zero rate VAT Code for domestic VAT reverse charge sales to help differentiate these sales from your other zero rated sales.

To create a new VAT Code:

•  In AccountEdge, at the top of your screen select Lists> VAT Codes.

•  The VAT Code List will appear.  Click New.

•  Enter a VAT Code reference, for example 'DVRC' or similar.

•  Enter a Description such as 'Domestic VAT Reverse Charge Sale' or similar.

•  Set the VAT Type to 'VAT'.

•  Set the Rate to 0%.

•  Set the Linked Account for VAT Collected and VAT Paid to your VAT Due liability account (2-xxxx).

•  Click the VAT Return Info button to open the VAT Return Information window.

•  Untick the Purchases (Inputs) heading checkbox so that this VAT Code is only available for use on sales transactions.

Domestic VAT Reverse Charge Zero Code

Adding required text to printed / emailed invoices

You will need to include the required domestic reverse charge notice to your printed / emailed invoices by using either a customised invoice form, or by adding the information to the body of the invoice at the time of recording.

Your preferred solution might be to include all or some of the text on a customised form, or to add all or some text at the time of recording the invoice, depending on what works best for you.

Example of required invoice text:

Reverse charge: Customer to pay the VAT to HMRC.

Domestic Reverse Charge applies to this sale and you are required to account for the reverse charge output tax on the VAT to HMRC.

All item lines on this sale are subject to standard VAT Rate of 20%.

 

Per the example above, you need to advise the customer what rate of VAT applies if the VAT amount cannot be shown, which is the case with AccountEdge since showing it on the calculation would mean charging the VAT.  Depending on your services the rates may be say @20%, @5% or a mix of both.

 

Adding text to the body of invoice transactions (recommended)

You can add the required domestic reverse charge notices to the body of your transaction.  The easiest way to do this is to use the Edit> Insert Header feature to a add free-text line to your invoice.

We recommend adding and recording the notice in the body of the invoice since this will be retained in the transaction for future reference, should it be required.

Example:

Domestic Reverse Charge Invoice

 

Customising an invoice form:

If you prefer you can add the required notice to a customised sales invoice.

To do this, go to Setup> Customise Forms> Invoices and create a 'Domestic VAT Reverse Sale' invoice form.

Example of edited invoice form:

Customised Invoice Form

NOTE:

Using this method will not retain a record of the domestic reverse charge notice in the invoice itself.  If you wish to retain a record of the notice we recommend you add the notice to the body of the invoice, per the example above.

 

 

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