How as a CIS Sub-contractors using QuickBooks do the changes in the Vat rules effect my business?

 

As of 1^st March 2021 the UK construction industry will have to change the way vat is handles following the introduction of the new VAT reverse charge scheme. Yes, the CIS Vat rules are changing.

QuickBooks is popular with construction businesses, both contractors and sub-contractors with it’s built in CIS features, production of CIS statements and CIS reporting.

If you’re in the construction industry and using QuickBooks here’s how the changes will impact on you.

 

So, what is the VAT reverse Charge all about and how should you handle it in QuickBooks Online?

 

In a nutshell rather than the supplier charging VAT, the end recipient/ customer of the supplies accounts for the VAT

The customer may recover the VAT which will mean a net NIL tax position i.e. no vat due to HMRC.

If there is a reverse charge element in the supply then the whole supply is subject to reverse charge. It will also cover the provision of construction services that include materials.

Let look at this in a little more detail.

You will need to decide if normal Vat rules or the new CIS rules (domestic reverse charge) should be used

The flowchart below will help

The chart is of useful for construction businesses using QuickBooks or other accounting software

 

When to apply new CIS vat rules for contractors

 

Once you have established that the vat domestic reverse charge impacts on your supplies you need to consider the impact on your business. Make sure you understands the impact on your VAT return. Check the first vat return after 1st March 2021 carefully to make sure you don’t under or over pay the VAT

 

If you’re a sub-contractor

If you are not VAT registered you can continue to Invoice without switching VAT on in QuickBooks (if vat is switched on select ‘no vat’ on your invoice).

 

If your Vat registered QuickBooks will be updating Vat codes and you will have a domestic reverse charge code which will produce the correct entry in your VAT return. The code will apply the sales value to box 6 (net value of sale) of your return but will not add a VAT amount to box 1 (vat amount).

 

As you will no longer add a vat amount to your sales you might find that you become a vat repayment trader – which makes you a business claiming money back on each return. If this is the case you may wish to apply to move to monthly vat!

 

It’s worth considering the potential impact on your cashflow. The vat you previously collected and paid over to HMRC will no longer be available to use pending payment to HMRC.

For example

You invoiced £5000+vat on a job. That’s £6,000 arriving into your account. You may have had use of these funds for up to three months. The amount you will receive after 1^st March 2021 would be £5,000 not £6,000.

 

If you’re a Contractor

As a contractor (you purchase CIS regulated construction services) you will need to pay any vat due to HMRC as part of your normal vat return but you will not be paying the vat amount to the subcontractor when Vat domestic reverse charge is used.

You may benefit when it comes to cashflow. You will not be paying the vat to the subcontractor but will be sending the vat to the HMRC on the next vat return. The net effect on the amount of vat you pay is NIL.

You will need to make sure the vat invoice you receive is correct, the correct vat code is used and the services are eligible for reverse charge.

On your Vat return Boxes 1, 4 and 7 are completed.

Nothing in box 6

Box 1 shows the output tax on the purchase, box 4 claims the same amount as input tax and the value of the purchase appears in box 7 (turnover).

 

In addition to using the new Vat domestic reverse charge rates in QuickBooks you will need to consider the wording on your invoice.

If you only have one invoice template in QuickBooks Online you may need to create a second to use when invoicing the contractor for services which come under the Vat domestic reverse charge scheme.

You can add another template via the gear (top right), setting, customer form styles.

The template can be set under default or selected at the point that the invoice is raised via ‘customise’ at the bottom of the invoice screen.

The Invoice will need to show that the Vat domestic reverse charge is applied. HMRC suggest you use any of the following.

 

• Reverse charge VAT Act 1994 Section 55A applies
• Reverse Charge S55A VATA 94 applies
• Reverse Charge Customer to pay the Vat to HMRC

 

The HMRC technical guide for reverse charge can be found via the link below

https://www.gov.uk/guidance/vat-reverse-charge-technical-guide

 

Katara run’s bespoke QuickBooks training and problem solving sessions for QuickBooks users in the construction industry. If you need help with QuickBooks CIS set up, running CIS reports or the impact of Vat reverse charge on your business book a QuickBooks session today.

 

 

 

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