This article explains how FreeAgent handles the domestic VAT reverse charge for subcontractors and contractors under the Construction Industry Scheme (CIS).
The domestic VAT reverse charge will come into effect on 1st March 2021.
VAT-registered subcontractors should follow these instructions when creating CIS invoices for contractors where the domestic VAT reverse charge should be applied.
VAT-registered contractors should follow the instructions in this article when recording CIS bills from subcontractors where the domestic VAT reverse charge has been applied.
Before you get started
To apply the domestic VAT reverse charge to a CIS invoice or bill, you must first enable non-standard VAT rates in your FreeAgent settings.
To do this, navigate to your company name in the top-right corner of the screen and select ‘Settings’ from the drop-down menu. Choose ‘VAT Registration’ from the ‘Accounting, Tax & VAT’ area.
On the ‘UK VAT Registration’ page, select ‘Yes’ in response to the question ‘Do you need to use VAT rates other than standard UK ones?’
How FreeAgent handles the domestic VAT reverse charge for subcontractors
It’s a good idea to review HMRC’s guidelines for the domestic VAT reverse charge and to check that the reverse charge applies to the CIS invoice you need to create.
Before you can follow the steps outlined below, you must enable the CIS feature for subcontractors in your FreeAgent account.
Creating reverse charge invoices
If you need to apply the domestic VAT reverse charge to a CIS invoice, open the ‘More Options’ area and choose ‘Reverse Charge’ from the ‘VAT Options’ menu when you create the invoice. Please note that you will only see this option if you have enabled non-standard VAT rates in your FreeAgent settings as described in the ‘Before you get started’ section.
Adding text to the invoice
Choosing the ‘Reverse Charge’ option will add the additional text ‘Reverse charge supplies’ to the invoice automatically. You can add to this text if you wish.
To comply with HMRC’s guidelines for creating reverse charge invoices you also need to include the rate or amount of VAT you would have charged on the sale if the reverse charge had not been applied:
- If this is a one-off sale, you can either edit the relevant invoice line item to include this information or add an additional line item, choosing ‘Comment’ as the unit type and including the VAT amount or rate in the description.
- If this is a sale that you will make regularly, we recommend that you save the information as a price list item when you create the invoice. This will allow you to add the information to other invoices quickly in the future. Include the VAT rate or amount in the price list item description, along with the relevant additional wording specified by HMRC, such as “customer to pay the VAT to HMRC”.
The image below shows how this information will be displayed on an invoice. The VAT rate appears as text and does not affect the amount that the customer is charged:
The effect in your VAT return
FreeAgent will automatically include the value of these invoices in box 6 of your VAT return. You can adjust this figure if you need to.
How FreeAgent handles the domestic VAT reverse charge for contractors
Recording reverse charge bills
If you receive a CIS bill from a subcontractor where the reverse charge has been applied, choose ‘Reverse Charge’ from the ‘VAT Options’ menu when you record the bill in FreeAgent. Please note that you will only see this option if you have enabled non-standard VAT rates in your FreeAgent settings as described in the ‘Before you get started’ section.
Adjusting your VAT return
You will need to adjust box 6 of your VAT return to remove reverse charge bills from your VAT return.