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Cis invoice example for HR

welcome to this technical brief on the cis domestic reverse charge my name is dean wooten i'm a vet specialist and this is quite an important area coming in from the first of march i just wanted to pick out a few points from this brand new system now from the 1st of march we do have a new domestic reverse charge on supplies within the building industry so building and construction services and goods supplied with those services i say new this system has been around for a long long time it's covered things like mobile phones computer chips emission allowances wholesale telecoms wholesale electric um but from the 1st of march it's being applied to services that will have a much wider impact uh than the previous missing trader targets and this is a missing trade target they're trying to stop the subcontractors charging that because over the past x number of years there's been many subcontractors charging that collecting that and disappearing with the vat so the idea behind this is to stop uh the subcontractors have the ability to charge that and pass on the vat obligations to the contractors they are billing now these new rules they will affect standard and reduced rated supplies that's 20 supplies and 5 supplies now that is on the proviso that the payments are reported through the construction industry scheme for direct tax purposes it doesn't matter what type of contractor you are whether you're a gross contractor a 20 contractor a third person contractor if the supply is reportable through the cis then you have met one of the two key conditions the second condition is a supply must be between registered parties so a vat wretched subcontractor for example billing a vat registered main contractor there are a few exceptions most important being end users and i will look at those shortly now because one of the key conditions is that registered about registered there is an obligation on the subcontractor to check the main contractors of that number now hmrc have a new service for this if you search hmrc that number checker you'll get directed to our hmrc website uh where you just put in your customers that number you put in your own that number and that's just so you can get a like a reference for your check and then they'll tell you who that number belongs to and you would assume it's going to come up with your main contractor so that would be what you need to do as a subcontractor check the main contractors that number the person you're billing uh they're that number on the new hmrc system so let's have a look how this works now i use a home extension now so what i've got here is a homeowner have an extension done and they've gone to one builder uh the vat registered main contractor and then that registered main contractor uh subcontracts some of the work now the drc the domestic reverse charge is applicable in between the vat richard subby and that registered main contractor so that's where the domestic reverse charge applies now all this means is that the subcontractor is not allowed to charge v80 on that invoice it's not optional this is mandatory you've met the two conditions cis reportable which it is and that registered to that registered which it is the drc the messenger at first charge is mandatory so how the invoice goes with just the net showing so that goes in box six of the fat return now the various domain contractor has the obligation to sort out the reverse charge now reverse charge is just putting the correct rate of that in box one and the net inbox seven so that's the reverse charge if you then look at what the evaporators have make a tractor supply to the homeowner they are providing extension services construction services and that is taxable at the twenty percent rate so standard rated now because the main contract is making an onward a taxable supply they have the ability to recover in box for the vat on the domestic reverse charge so for the maker tractor it's just straight in and out now the main contractor would then obviously deal with their sale to the homeowner so that's box one after that whatever they're charging the homeowner and box six for the sale so that is the core provisions for the domestic reverse charge it's not optional if you meet the conditions then you have to do the domestic reverse charge hmrc are intent on now allowing the subcontractor to charge v80 so therefore that missing trade of that that's happened for many many years and just won't be there and because the vapor is the main contractor they put the vat in box one and they recover it in box four assuming they're fully taxable uh which most are now how would this apply to tiered uh contractors so i've got more like contractors down the line so let's look at this and we'll deal with it one by one so i've got a fat registered subcontractor invoicing of that registered contractor now you've met the two conditions cis reportable and rat registered about registered the drc is mandatory and so the various subcontractor puts the net in box six and the vat rotor contractor uh puts the domestic reverse charge in box one that's the fat recovers it in box four and then puts the net in box seven um so we deal with that reverse charge first now the register contractor is then invoicing that avat registered main contractor and so we're then going to deal with that now that meets the conditions i've got cis reportable and that registered about registered so i've got another domestic reverse charge on a higher amount because obviously you'll be marking up what they buy in so i've got the drc on that invoice so the register contractor puts the net of that invoice in their box six on their vap return the right register main contractor sorts out the reverse charge in their books so that's box one on their rat return for the vat recovers in box four and then puts the net in box 7. they would then charge the homeowner for the extension standard rated box 1 box 4 on their map return so the provisions in principle are reasonably straightforward but there are some compliance issues that we just need to make sure you know what do we put on the invoice for example let's look at supplies straddling the 1st of march 2021. now the tax point i will determine whether you charge that under the old rules or apply the domestic reverse charge there is no apportioning of invoices around the 1st of march 21. it's either all old rules or all new rules now the tax point in the building industry tends to be under the continuous supplies of services and that will be the earlier of invoice date or payment so that's generally going to be invoice date if it's just a one-off job then it's going to be when the the basic tax points when the service is performed completed could be earlier if it's invoiced or paid and so you might have a an earlier tax point if there's a deposit for example but that would only be on the deposit so what you're looking at is basic tax point rules now if we look at the an example of this let's say i have got a contract which straddles uh the 1st of march 21. so work is done before and after but it's not invoiced until let's say late march now that is invoiced in the new system therefore the whole invoice is subject to the domestic reverse charge you don't apportion it between old rules and new rules this would be the same things like self-billing authenticated tax receipts a lot of guidance in there on the revenue website on those but essentially for those the tax point is normally going to be when entered into the records and when you enter it to the records if you're entering it in say march time that's going to be new rules if you're entering it in february old rules and so who's got the risk on this domestic reverse charge that's important uh that the drc is applied correctly to the invoice because if it isn't and a subcontractor charges that because that's what they've always done then vat has been improperly charged now any main contractors or contractors recovering that are not in a good position because they are recovering that but has not been properly charged and now that is not allowed so therefore technically you're recovering something that you shouldn't a fair enough hmrc have said in the early days of the domestic reverse charge we're going to introduce like a soft landing period almost where there's no penalties if you're just doing the best you can but i want to get it right and if i'm the main contractor and i receive an invoice which i know should be domestic reverse charge but the sub contract has added that to it in error then i'm going to send the invoice back and tell them you need to issue me an invoice with the domestic reverse charge i'm not paying that uh where there's a chance i might not get it back now it is a subcontracted responsibility to apply the domestic invest charge but the risk of it not being applied correctly falls on the contractor and so we they both have obligations but the risk is all about that main contractor don't pay that when you think the supply should be subject to the domestic reverse charge now thankfully all the software providers are getting up to speed with the domestic reverse charge and the software deals with pretty much all the compliance so software packages such as xero quickbooks sage for example they deal with all the accounting now you have to in xero for example you have to enable the new domestic reverse charge to hatch rates in the software now in xero you just click in the accounting menu advanced and that's where you do things like journals but another tab within that accounting menu that advanced menu is tax rates if you click on that uh then you get through to this page which says do you want the domestic reverse charge tax rates to apply in your software and you just click it now from that point uh the software recognizes that you could be raising an invoice subject to the domestic reverse charge so therefore when you next raise a sales invoice as a subcontractor and you're putting in all the lines and you go to the vat rate normally see options come up as 20 or 5 percent with zero rated for example you'll see a new kid on the block uh you'll see a domestic reverse charge of 20 and that's actually there's two uh or a domestic original verse charge of five so you still need to know what contracts are normally 20 like commercial contracts for example and which contracts are five percent let's say conversions because you have to apply the correct tax rate to the invoice and what the software will do from that point is just take it from there so put all the right narrative on the invoice they won't charge that on the invoice and so just identify in the software as domestic reverse charge 20 or domestic reverse charge 5. the same options apply when entering a purchase invoice less onerous when entering a purchase invoice because you haven't got to worry about all the right narrative on the invoice look at the invoice coming in from your subcontractor that should have all the right narrative on it and you just enter it into your purchase software and you make sure that when you enter it when you're entering that you put the right domestic reverse charge rate in there and the software will take it from there so for the sub contractor for example if i raise an invoice and i put domestic reverse charge 20 the software won't charge that on the invoice and they'll put the net in box six of them that return if i'm entering it as a main contractor like a subcontractor's invoice and i make sure i enter it as 20 domestic reverse charge the software will put the vat in box one and recover it in box four and they'll put the net in box seven now if i'm the sami raising that bill if i just identified when i raised the bill as a 20 domestic reverse charge for example then when you look at the invoice that the software generates it has on there for each line on the invoice uh the correct narrative and it should say in xero for example it says domestic reverse charge 20 and that's on a line-by-line basis you could either show the amount of that or the rate of that and the software i've seen always quotes the rate of that it just says domestic reverse charge at twenty percent it doesn't put the vat in there because you're not charging that it'll also produce automatically a required narrative on that invoice and you see it on the bottom left on the xero software on the invoice and it says reverse charge applies to the itis mark with the metric first charge customers need to account for that on those items to hmrc at the rate show now they are mandatory provisions which the software does automatically if you identify it as a domestic reverse charge supply when you're raising the invoice if you're dealing with clients that have a system that doesn't accommodate this like for example they're still using spreadsheets and then obviously all the emphasis is on them to manually generate the invoice with the correct wording on but all the proper software the good software will do this automatically all right let's look at cashflow now this is one of the big problems uh with this new system many subcontractors rely on the output tax they charge for cash flow and now this is a very much integral part of their short-term funding they charge it collect it and don't pay over to hmrc until what one two three months later and that's a rolling situation so their cash flow generally is boosted by the ability to charge vat now from the 1st of march 21 they'll not be charging that so access to that funding will disappear they will suffer a cash flow and hit now subcontractors need to make plans for dealing with that shortfall and it's not just this that's going to affect them in 2021 many of them would have deferred their vat from february march or april 2020 under the coveted um deferral rules and that will be coming back in installments uh through 2021. some would have deferred their tax that was due on the 31st of january 21 and they'll be paying that uh by installments through 2021. so subcontractors may be suffering quite a bit cash flow wise through 2021 obviously to identify that recognize that and try and give advice wherever possible to to assist them with their cash flow the main contractor is completely the opposite they benefit from these new rules because they don't physically pay out the vat anymore they literally put it on their back return box one box four so therefore the main contractors are actually improving their cash flow because of these new rules coming in now one of the things we could help the subcontractors with is doing monthly returns because many subcontractors are likely to become repayment traders so many would work exclusively on certain types of work let's say commercial they might be traveling to major cities london manchester birmingham for example and working on large construction projects there now their services will be domestic reverse judge uh so therefore they're gonna become repayment traders there's going to be nothing in box one and they have the ability to recover their input tax in box four they will become a refund tax base or repayment traders now they could apply to move to monthly returns to improve their cash flow if i was saying this even what two three years ago that might have sounded a bit um odd to say that because you know why would one do 12 vac returns rather than say four in a year and the work involved in that might be quite high but actually is it because under these uh under the new software mtd software making tax digital software it should be okay now applications are accepted from the start of the month of application so if you want to go to monthly returns if your client's got decent software then you can apply uh in early march to go to monthly returns now you'll have to finish off your old cycle but you'll get notified what that cycle is by the mtd system and you finish off the old cycle and then from that point you're doing monthly returns which as i say should be much easier if you're they're using the likes of xero sage quickbooks etc and because they're not these subcontractors they're not overly complicated in terms of their their vat affairs and if they're using bank feeds to push data into their software as well then the court leave out return could easily take five minutes uh if they do some records and quite simple affairs now doing a pressing obama once a month or once a quarter there shouldn't be a lot of difference there and it's something that they should at least consider they might say actually it's too much aggravation my records aren't that great absolutely stick with cordless but for a lot of them that are using mtd compatible software then this wouldn't be a bad thing to consider it would certainly help them now many small contractors may be using the flat rate scheme for accounting vat they would still be charging for out at 20 of the old rules five percent under the old rules but they account at their flat rate now the domestic reverse charge supplies uh from the first of march they are excluded from their flat rate turnover so they don't account for the flat rate on their domestic reverse charge income but if they stay in the flat rate yeah fair enough their box one will be zero but by staying in the flat rate they restrict recovery in box four on their vat return because if you flat rate you can only recover on three things really which is capital goods over two thousand pounds about inclusive uh the bad debt relief and pre-registration input tax that's it so what these traders should be doing is coming out of the flat rate from the 1st of march at 2021 their box one will still be naught but by coming out of the flat rate from the 1st of march they will open their box full and they'll be a refund trader and they could consider monthly returns all right so that's the flat rate so i just want a quick look at mixed invoices because obviously when we're billing there's going to be other stuff on the invoice now the hmrc has simplified this massively if any of the services on the invoice are subject to the domestic reverse charge then the whole invoice will be subject to the domestic reverse charge even if there's stuff on there that wouldn't normally be as subject to these provisions if there's one drc supply on that invoice the whole invoice is subject to the domestic reverse charge and the customer the main contractor say will then have to go through the invoice line by line and apply the domestic reverse charge at the appropriate rates so you maintain the integrity of the supply because what you're trying to do is put the contractions position as if they've been charged uh that by the subcontractor so therefore the invoice comes in with no that on it and then the maker tractor when they're retrieving the system they're going yeah that's a drc at 20 because it was commercial work uh that's a drc at five percent for example and because it was a conversion work so you maintain the integrity of the domestic reverse charge in the customer's books the main contractor normally now there is an optional five percent disregard where the subcontractor can apply that to the whole invoice i wouldn't expect to see that very often but it is there so for example if the cis service on the invoice was let's say four percent of the invoice total uh then if you wanted to it's optional you could charge that on the whole invoice or you could just say well there's an invoice that has a cis reportable service so i'm going to apply the drc to the whole lot um so you've got a choice now if it's five percent miranda the cis element you could do the drc or you could say i'm going to charge that in the normal way it's quite an important comment and statement by hmrc throughout their guidance and what they've said is if in doubt always apply the drc to cis reportable work as supplied to vat registered businesses it is the default so what they're confirming is there's two key conditions the service must be sea ice reportable and it must be registered about registered if you hit those then you assume that drc is in point and out the invoice goes we know that and all the narrative on there about the domestic reverse judge there are some exceptions to the domestic reverse charge so the domestic reverse charge will not apply to zero rated services so if your business is house building then you're used to getting all your services coming in at the zero rate built carpenters electricians etc then they are not within the domestic reverse charge provisions because there's no point there's no risk of missing trade of that because they've never charged that in the past so they stay as they are they don't fall within the domestic reverse charge now the domestic reverse charge does not apply to employment businesses either now that is simply because they are supplying staff rather than construction services so for example they might get a call from a client saying i need four carpenters on site on monday can you supply them and they'll say yeah we can do that and you just make sure that four carpenters turn up on monday morning now you are supplying staff not carpentry services so therefore employment businesses are outside of the domestic reverse charge they will continue to charge that as they have done before now the big exception and the one that's causing a few issues in terms of understanding what it is it's end users now end users i'll explain what they are but they are only accepted if they confirm their end user status in writing if they don't do that then they're not regarded as an end user now end users are consumers or final customers of building and construction services they're businesses that do not make onward supplies of construction services so for example developers they are end users because they don't intend to sell on construction services they intend to sell completed properties so developers are end users now the end user would probably be registered for cis now for direct tax purposes probably as a mainstream contractor some of them as a deemed contractor but they will be registered for the construction industry scheme so here we've got the conditions kicking in there's cia's reportable they've that rest of that rested normally and so we're thinking the domestic reverse charge applies but developers are end users and they have the ability to disapply the domestic reverse charge and essentially carry on as they were let's look at an example of end user status i've got a various subby doing work for a developer that developer is going to be converting pubs into flats and selling the flats to buyers now the developer decides to give end user status confirmation to the subcontractor that means the subcontractor behaves perfectly normal so they charge that at five percent that's the appropriate rate on qualifying conversions they put the vat at five percent in box one they put the net in box six when the developer sells on to the buyer zero eat it when you sell flats that have come from say commercial the sale is zero rated which gives them the ability to recover v80 on the five percent and they put the net in box seven now let's see if they develop a confirms end user status but some developers might look at this and say actually i don't want to confirm status now so and they decide not to now the legislation is drafted so the subcontractor assumes that drc is in point unless they get rid of confirmation of end user status there's no obligation on the end user to issue that confirmation as if no confirmation is given the drc remains in point and this is because hmrc want the drc to apply and because the risk for them is subcontractors charging that and so therefore the legislation's drafted uh to make it almost across the board drc applying uh so drc in this instance if there's no confirmation that would be what applies and i'm thinking well how many end users will confirm their status i don't think there'll be that many because the cash flow advantage of not confirming status will be significant to them so let's look at an example with no confirmation so i gotta factor it as a subcontractor same situation uh billing a developer but this time the developer does not confirm end user status they are an end user because they are selling flats to a buyer they're not supplying on construction services but the developer has chosen not to confirm status now that means the drc has to apply to the invoice between the subby and the main contractor and so the subbie would put the net in box six now the developer will then account for the reverse charge in box one and put the net in box seven the developer has that zero eighteen onward supply of the flats to buyers and by making a taxable supply the developer can then recover the v80 on the domestic reverse charge in box four now i think developers will not confirm status i think they'll like the idea of the best reverse charge applying now there is nothing the servers can do about it they can't force the developer to issue the end user confirmation if it's really important to the sub is that they charge that and many will want to do that because of cash flow then address it in the contracts you know address it in the agreement up front and you could use the same wording as what hmnsc suggests on the confirmation just tweaking a bit and in the contract for this this work uh just how because they're both going to cite it uh that the developer agrees they are an end user for the purposes of the domestic invest charge and accept the v80 will be charged on the invoices so address it up front and because once you're in the contract you can't force them to issue an end user confirmation now that concludes this short run through of the domestic reverse charge if you've got any questions do contact me via the website my name's dean woodson so via the website and i can help you with anything you've got but that's this quick summary of the new rules from the 1st of march 2021.