Melanie Lord was the guest for a ‘Tony Talks’ ICPA webinar on the Domestic Reverse Charge. Here are some questions accountants asked Melanie and ICPA CEO, Tony Margaritelli
First off, Melanie explained the services that are included in the reverse charge. The three tests to apply are:
1. Is the work of a kind covered by the scheme?
2. Is my customer registered for both VAT and CIS? (If so, keep evidence)
3. Is my customer the end user? (If not, keep evidence)
If you answer ‘Yes’, ‘Yes’ and ‘No’, then the DRC will apply.
Question: What about retentions, does the reverse charge apply?
Answer: A retention is just a mechanism for dealing with part of the contract price so as the same treatment should apply to all payments made under a contract. Whether DRC applies will be dictated by the answers to the three test questions for the job as a whole.
Q: If a supplier only provides services that are within the scope of CIS as part of wider services, is it only the CIS services that are within DRC? Would their other supplies be business as usual?
A: HMRC confirm that if any of the services in a supply are subject to the reverse charge, all other services (even if that service would be excluded if it were being supplied as a single service) will also be subject to it.
How does it work with other schemes?
Q: I assume it can’t be used with cash scheme, which will cause a cash flow problem.
A: The Cash Accounting Scheme cannot be used for a supply of services that is covered by the DRC.
Q: How will flat rate scheme be affected?
Answer: Reverse charge supplies are not to be accounted for under the FRS so, given that the supplier will no longer receive payment of VAT from their customers on some or all of their sales invoices, this might mean the scheme is no longer a benefit. FRS users who receive reverse charge supplies will have to account for the VAT due to HMRC.
Q: So are you saying that the VAT will have to be paid if on the flat rate scheme?
A: The answer is the same. Reverse charge supplies are not to be accounted for under the FRS so, given that the supplier will no longer receive payment of VAT from their customers on some or all of their sales invoices, this might mean the scheme is no longer a benefit. FRS users who receive reverse charge supplies will have to account for the VAT due to HMRC.
Who is the end user? Non VAT registered contractors obligations?
Q: Could you confirm if the end user is the final contractor who invoices the customer (house owner) or if the house owner is the end user?
A: The house owner. If someone is on-charging the service they are not the end user.
Q: So just to confirm, if the customer has not provided confirmation they are an end user, then VAT should be charged under the normal rules, going against the Annex 1 of the guidance?
A: VAT is chargeable as normal if the customer is the end user. A business customer could be either the end user or a customer covered by the DRC. To assume DRC treatment could lead to a risk of VAT falling due from the supplier without them having recourse to the customer. To protect itself the default position for any supplier who has been unable to confirm the customer’s status could be to assume the customer has end user status and charge VAT. If the customer is not end user it is really up to them to confirm their status to their supplier.
Q: Who pays VAT in the end?
A: That would be the end user.
Q: What is the situation where the sub-contractor is not VAT registered? Do they have to pay over the contractor’s VAT charged to the developer?
A: The DRC rests on the three test questions (see page 1), one of which is whether the customer is VAT registered. If a supplier is not VAT registered then nothing will change. If they are the customer and receiving supplies but not VAT registered then they will be treated as being an end user and charged VAT in the normal way.
Q: What if the customer does not know if they are the end user? The house may be to sell, but if it doesn’t sell they might rent it out.
A: Unless they are on-charging construction services to their own customer then they will be the end user. Buying in construction services in order to either sell or let a house would not stop them being end user.
Q: For a company that builds new build residential homes, who is the end user? The company or the purchaser of the house? If it’s the company, I assume that they should be being charged VAT, which they then reclaim.
A: The house builder will be the end user as they are not on-charging construction services. Buying in construction services in order to either sell or let a house would not stop them being end user.
Q: Our customers will be end users, so we will charge them VAT in normal way. But will our subcontractors pay the VAT for us?
A: No, it’s the other way round. The subcontractors won’t charge VAT as under current rules. Instead, by confirming that you do not have end user status you will have to account for VAT under the DRC on the incoming purchases.
How is the reverse charge entered on to the VAT return?
Q: So VAT is in box 1 and box 4 – is this correct?
A: Yes, subject to any input VAT restrictions under things like non-business or partial exemption apportionment.
Q: A supplier correctly makes a supply under the DRC rules – in their accounts and on their VAT return there is no output tax to be entered in box 1. But do they enter the value of the sale in box 6 of their VAT return?
Q: Do you think we should use the European sales and purchases boxes on the return?
A: Personally, no. I think this could create even more confusion, which is never a good thing.
Q: What if the contractor is on flat rate VAT? Should Box 4 be empty?
A: Reverse charge supplies are not to be accounted for under the FRS so, given that the supplier will no longer receive payment of VAT from their customers on some or all of their sales invoices, this might mean the scheme is no longer a benefit. FRS users who receive reverse charge supplies will have to account for the VAT due to HMRC, so in these cases box 4 will not be empty.
Q: So to confirm, it’s not like reverse charge on EU sales at the moment?
A: The concept and mechanism are the same as for EU sales and purchases, but the tests and basis are, of course, quite different.
Q: What about the supplier? Don’t they need to reverse out the 20% too? Otherwise HMRC would be paid twice.
A: Where the DRC applies the supplier doesn’t charge VAT – this is the reversed bit – the customer charges VAT to themselves instead of being charged by the supplier. So no, HMRC won’t be paid twice.
Q: Sending a letter for box 1 and box 6 could lead to discrepancies. We need white space on the VAT return (box 10)!
A: If you have a large repayment in the mix then covering off the possibility of HMRC querying the apparent mismatched values has to be a good idea. A white space might also be a good idea, but I somehow doubt we’ll see that happening.
Q: Should the reversed VAT be included in box 4 as well to contra?
A: The customer faced with DRC accounting includes the VAT in box 1 – this is how the tax is paid over to HMRC, and then includes the equivalent amount in box 4 – being the same claim as at present. All claims will remain subject to apportionment under non-business and partial exemption requirements.
Q: What entry does the supplier make on their VAT return. Should there be an entry in box 7?
A: The supplier includes the net value of the sale in box 6. The customer includes the net value in box 7.
Q: I’m talking about one VAT registered CIS contractor to another VAT registered CIS contractor. In that case, would the supplier just not charge VAT?
A: If the supply is a specified supply and the receiving contractor is not the end user (which contractors could be if they weren’t on-charging) then yes, the supplier doesn’t charge VAT. The customer posts both VAT on sales made by the supplier (this is the reversed part) and claims VAT on purchases as normal and subject to the usual restrictions.
• Melanie Lord is a director of AVS VAT. Email email@example.com or call 01438 716176 if you need help with VAT
This is a small selection of the questions asked by ICPA members to Melanie and Tony. If you would like a copy of our special VAT Supplement dedicated entirely to the DRC then please email your details to firstname.lastname@example.org
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