Domestic reverse charge VAT for the construction industry

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What is domestic reverse charge VAT?

Domestic reverse charge VAT legislation is a change in the way CIS registered construction businesses handle and pay VAT. It is being introduced in the UK on 1 March 2021, having previously been delayed from October 2019.

Why is it being introduced?

The domestic reverse charge VAT procedure is an anti-fraud measure designed to counter sophisticated criminal attacks on the UK VAT system. It intends to cut down on “missing trader” fraud, where companies receive high net amounts of VAT from their customers but have no intention of paying the VAT to HMRC.

Who will it affect?

It affects VAT registered construction businesses who supply or receive construction and building services that are reported under the Construction Industry Scheme (CIS). It means the customer (contractor) will be responsible for the VAT due to HMRC instead of the supplier (subcontractor).

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What does reverse charge VAT mean for you?

If you are a CIS subcontractor you will no longer charge VAT to your CIS customers. Instead, on your invoices you need to state your customer is responsible for the VAT and show what VAT rate should be applied.

If you are a CIS contractor when you receive a bill from your CIS subcontractor you are responsible for reporting both the input and output VAT on that bill.

Impact on your business

This change may impact your cash flow .If you are a subcontractor then it’s likely your short term cash flow will be impacted as you will no longer be receiving the VAT payment from your customer. If you are the contractor, you will likely have a short term cash flow benefit. 

You should also review what you currently use to manage your business finances. If you don’t currently use online software then this is a great time to start. Using cloud accounting software like Xero makes life a whole lot simpler especially when dealing with CIS and VAT.

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Why choose Xero to manage reverse charge VAT?

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Automatic calculations on bills and invoices

Xero handles domestic reverse charge automatically, ensuring you have the right information shown on your CIS sales invoices. For CIS bills you receive, Xero will know you have to account for input and output VAT, and process appropriately – the hard work is done for you so you can focus on the job at hand.

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Easy Making Tax Digital VAT returns

When filling out your VAT return form, you don’t need to worry about what boxes in the VAT return to update for domestic reverse charge because Xero automatically takes care of this for both sales invoices you send and bills you receive. With Making Tax Digital and Xero, submitting VAT returns has never been easier!

Find out more

Download our guide to domestic reverse charge VAT

Thank you for your interest!

Please download the PDF from this link.

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Start using Xero for free

With Xero’s intuitive online accounting software the hard work is done for you. Easily manage domestic reverse charge, stay compliant and put business accounting tasks on autopilot.

Start your 30-day free trial today.

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Watch the webinar

Managing Reverse Charge VAT and CIS

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In this webinar we cover:

  • What Domestic Reverse Charge VAT is 
  • How it will affect your business if you are a Contractor or Subcontractor
  • How to prepare your business for the mandatory change when it is introduced 
  • How Xero can help manage Domestic Reverse Charge VAT and CIS

More resources on domestic reverse charge VAT

Xero blog

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HMRC guidance

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Xero for construction

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