VAT Reverse Charge For CIS
Monday 29th March 2021

The VAT reverse charge for the construction industry changes how VAT registered businesses dealing with suppliers or customers in construction handle VAT. It effectively moves responsibility for the VAT from the supplier to the customer with the purpose of preventing fraud.

The CIS scheme isn't supported in Avanti as it is not aimed at construction-based businesses however some of our customers do have construction companies as customers and/or suppliers and need to be able to handle the VAT reverse charge in their VAT returns.

In this post we walk you through the steps needed to record transactions to ensure you account for the CIS reverse charge in the right way on your VAT returns.

The process of the VAT reverse charge is to move the responsibility for the VAT from the supplier to the customer. It does this by taking away the supplier's ability to charge or receive payment for the VAT element. Therefore when both the customer and supplier are VAT and CIS registered, the supplier must issue the invoice without VAT and specify on the invoice that it's a reverse VAT transaction and the customer must cater for the VAT element. The customer must then account for the VAT on the transaction for both inputs and outputs on their VAT return.

If acting as the supplier eg the sub-contractor it's very easy, just record the invoice with a zero-rated VAT code so it appears with zero VAT on the invoice. You will have to put a note on your invoices at the bottom stating that your customer has to account for the VAT at the relevant rate. The best way to do this is to setup custom notes on the particular customer's record. You do this by editing the customer's details, click the Notes tab, then click the Transaction Notes tab and enter the notes. By doing this the note informing the customer that they have to account for the VAT themselves will automatically be placed on their future invoices.

If acting as the customer eg the contractor, it's a lot more involved. You will need to record the supplier's invoice as usual but rather than enter zero, as they have on their invoice, you calculate the VAT at the relevant rate. We advise utilising an unused VAT code for this purpose and set the rate accordingly so every transaction can be identified as a reverse VAT transaction eg VAT codes 3, 4 or 6 are generally unused (You can do this in Company Preferences under VAT > VAT Rates). If all invoices for that particular supplier (sub-contractor) are to be dealt with in this way it's best to define it on the supplier's record as their VAT Code and tick the "Always use this VAT code ..." so that you don't need to remember to set it for each transaction.

As we're not directly supporting the CIS VAT reverse charge on the VAT return, the trick is to get the figures into the right boxes on the VAT return without utilising transactions that have an unwanted effect elsewhere. For example, let's say you have an invoice for £250 which you have to apply £50 VAT on. You can get this into Boxes 4 and 7 as normal by recording it as a supplier invoice and including the £50 VAT on the invoice. However to act as the mechanism to get the reverse VAT figure into Boxes 1 and 3 to affect box 5 as the reversal of the VAT, you will also have to record the £50 VAT value as a sales transaction.

To do this you will need to record a Journal sales invoice by setting up a Customer record for the supplier and entering a journal invoice. In the journal invoice, enter a line for any account you want (as it won't be affected), leave the net value as zero and enter £50 into the VAT column. We would again advise using the VAT code designated for the purpose of reverse VAT entries.

After entering the VAT-only sales transaction, you should have the correct result on the VAT return with an entry in Box 1, 3, 5 and 7 but with zero in box 5 (as it relates to this particular purchase), as the VAT has been reversed out. Also you won't have an entry in Box 6 as, according to HMRC guidance, there should not be recording of net outputs in the process.

However you now have a customer and a supplier with outstanding balances on their account for the non-existant VAT value, in this example £50. To resolve this you can now treat this as a contra entry.

Setup a new bank account in the Bank section which you can name specifically for handling CIS VAT Reversals. You can then pay the £50 VAT amount for the supplier's invoice as a supplier's payment (for speed use Quick Pay on the right-click menu in History), ensuring to select the newly created reversal bank account. Do the same thing for the Customer's account, by paying the entered invoice for the £50 VAT.

The net effect is that the supplier's account has an outstanding amount of £250 for the net amount of the invoice, the customer account is zero and the new reversals bank account is zero. Importantly the right figures are in the right boxes on the VAT return to comply with the CIS VAT reverse charge. Long-winded but it gets you to the desired end-result.

We should point out that this method works for the Standard VAT Scheme only, it won't work for the cash accounting scheme due to the requirement for the reverse VAT transactions to be accural based regardless of the actual VAT scheme used.

If you'd like us to directly support the CIS scheme, including the VAT reverse charge process, please let us know. We're always listening and if there's enough demand we'll look to develop support for it in the near future.