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CIS: How FreeAgent handles the domestic VAT reverse charge for contractors

This article explains how FreeAgent handles the domestic VAT reverse charge for contractors under the Construction Industry Scheme (CIS).

The domestic VAT reverse charge came into effect on 1st March 2021.

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.

For information on how FreeAgent handles the domestic VAT reverse charge for subcontractors, please see this article.

Before you get started

To apply the domestic VAT reverse charge to a CIS bill, you must first enable non-standard VAT rates in your FreeAgent settings.

To do this, select 'Settings' from the drop-down menu in the top-right corner and then select 'VAT Registration' from the 'Accounting, Tax & VAT' section.

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On the ‘UK VAT Registration’ page, scroll down to the ‘VAT settings’ section and select ‘Yes’ in response to the question ‘Do you need to use VAT rates other than standard UK ones?’. Select ‘Save Changes’ at the bottom of the screen to complete the process.

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How to record reverse charge bills

If you receive a CIS bill from a subcontractor where the reverse charge has been applied, begin by following the steps to record the bill in FreeAgent, then choose ‘Reverse Charge’ from the ‘VAT Options’ menu. 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.

When creating the bill, make sure to enter the gross amount of the bill into the ‘Total Value’ box. FreeAgent will automatically add 20% VAT into the appropriate boxes on the relevant VAT return.

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The effect in your VAT return

FreeAgent will automatically include the relevant values of these bills in boxes 1, 4, 6 and 7 of your VAT return in FreeAgent. Please note that you will need to adjust box 6 of your VAT return to remove reverse charge bills from your VAT return.

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If you need to account for only 5% VAT on the bill, for example if the work is related to converting premises, then you will need to post journal entries to reduce the relevant amounts of VAT in boxes 1 and 4.

For example, if FreeAgent has posted £100 of VAT into boxes 1 and 4 and the correct amount would be £28.57, you would post the following journal entries for the difference:

  • Debit account ‘819 - VAT Charged’ with £71.43
  • Credit account ‘818 - VAT Reclaimed’ with £71.43

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If you’re unsure about which journal entries are required, please speak to your accountant.

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