What is it?
The ‘CIS reverse charge’ scheme comes into force from the 1st of March 2021.
This scheme means that if you are both CIS and VAT registered, the way you do your invoicing may change, as you may fall under the new scheme.
If you fall under the new scheme, and you are not providing your service to an ‘end user’ (the public for example), then the new ‘domestic reverse charge’ means that you will no longer need to add VAT on your invoice. This applies to both your labour and any materials.
Does it apply to me?
This will be very common if you are a CIS or VAT registered subcontractor invoicing a CIS or VAT contractor for the work you’ve completed.
You will need to include a line on your invoice which states the goods and services have been provided under the CIS reverse charge scheme.
If you use accounting software this should handle this with a new ‘VAT Code’ (see our action list below).
When you start working on a new contract, it is advisable to ask the contractor you are supplying if they believe they are an end-user. If they are an end-user, then the normal VAT rules apply.
You may find you have already received correspondence from your existing contractors letting you know that they expect your invoice to apply the new reverse charge rules (i.e have no VAT on it). In some cases, they may have told you they are an end-user, and normal VAT rules will apply.
You can see a flowchart of when to apply the charge HERE.
Will it cost me any money?
In short, no.
However, see the next question as it may affect your cash flow.
If you receive a reverse charge invoice (for example you are a contractor), it has the effect of you charging yourself VAT and reclaiming it on the same return, so this will not affect the amount you have to pay HM Revenue & Customs.
Hence the name CIS Reverse Charge.
So will this hurt my cashflow?
The answer to this depends on whether you are a contractor or subcontractor.
For subcontractors, the answer could be yes.
If you think usually you receive an extra 20% VAT with each invoice, which you may use in the course of your business until you had to hand it over (usually each quarter). You will no longer receive this money, so it *might* be that actually end up in a VAT reclaim position each time.
In that instance, you might improve your cashflow by filing monthly VAT returns to receive the repayments each month, rather than a quarter. You should consider the cost and paperwork issues with this, however!
What do I do now?
1. Clarify whether the businesses you are invoicing are registered for CIS / VAT and whether or not they are an end user (presuming it’s not clear).
There is sample wording below they can use in an email to you if they believe they are an end user.
This would be a good check every time you start to work on a new contract.
2. Follow the flowchart HERE to understand if your invoice will need to apply the new rules for that customer/client.
3. If you deal with domestic customers in the main, consider adding a statement in your terms & conditions to say you’ll assume that your customer is an end-user or intermediary supplier unless they say they’re not. This places a responsibility on the customer to respond if this is not the case.
4. Amend your invoicing software (if you use one) to deal with the new charge.
Understand how it works and how to invoice with the new codes.
Details for Xero https://central.xero.com/s/article/Domestic-Reverse-Charge-in-Xero
Quickbooks HELP HERE
5. If you are on a flat rate scheme, check with your accountant how you will be affected.
Here is what your client can use if they are an ‘end user’
This wording can be used by your client or customer to declare themselves an End User, in an email to you for your records
“We are an end-user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge”
NB: In this blog we only give a summary of the need to know information for the general majority of cases. The rules are detailed and therefore you should seek advice on your own circumstances.
HMRC Guidance HERE.