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Cis invoice example for Support

hello and welcome to today's webinar on the construction industry scheme domestic reverse charge theory preparation and also the implementation in both stage 50 cloud accounts and stage business cloud accounting my name is jackie and i will be taking you through today's training session let's take a look at today's agenda so this webinar is split into two parts part one is going to be looking at those theory and preparation steps with part two looking at the implementation so in part one today we'll be looking at an introduction and overview of domestic reverse charge we'll also look at missing trader fraud and how to solve this we'll look at steps to prepare for these changes coming into force and also some of the other considerations under part two we'll then look at how to process incoming supplier invoices how to issue your customer invoices where domestic reverse charge applies we're going to look at the impact on the vat return we'll also have a look at some of the common questions and also a look at the further support and help we have available for you so due to some exciting recent updates to our sage business cloud software we will actually be demonstrating the processing of domestic reverse charge on two different products today so please do be aware during the demonstrations that not all slides may be relevant to your situation we have kept these as two separate sections for clarity we have some clear objectives for today's session so number one you will understand the upcoming cis domestic reverse charge legislation two you will understand what you need to do as a business in order to process domestic reverse charge transactions and finally you'll understand the impact on future vat returns so now it's time to have a look at some of the theory behind domestic reverse charge before we begin however i will just highlight some of the terminology used today often this legislation is referred to as domestic reverse charge it may also be referred to as reverse charge 4cis and today you may also see it shortened to drc so let's take a look at some background first so this was originally due to come in in october 2019 and originally it was delayed to allow businesses more time to prepare the covert 19 pandemic further delayed this and it's now due to come into effect on march the 1st 2021 this new legislation will apply to most businesses involved in the construction services and domestic reverse charge applies to both standard and reduced rate services it's for businesses registered for vat in the uk who were reported under the cis scheme so if you're not sure whether the services you supply are subject to the domestic reverse charge legislation hmrc do have an extensive list on their website the link for which is on the screen at the moment and will be found in your handout so the domestic reverse charge changes the way that vat will be processed within the construction industry it has no impact whatsoever on the current cis process of withholding tax for your subcontractors it's an anti-fraud measure which is being introduced to prevent something called missing trader fraud which we'll cover on the next slide it's believed that this legislation could affect 150 000 businesses in the construction industry and as you all know from other legislation changes there will be penalties for non-compliance domestic reverse charge means there will be a liability transfer so it's going to introduce notional vat to contractors in the middle of the supply chain that moves the liability away from them transferring up to the final contractor in the supply chain who will then pay that to hmrc so as we mentioned earlier this new legislation is an anti-fraud measure it removes the opportunity for fraudsters to charge v80 and then go missing before paying it over to hmrc and this is what we're terming missing trader fraud and this is where organized crime gangs will take over companies or create shell companies to steal vat whilst operating alongside actual construction services so let's take a look at how that works so under normal circumstances a subcontractor will invoice the main contractor adding on the 20 vat the main contractor will pay that invoice including vat to the subcontractor the main contractor can then reclaim the v80 from hmrc and the key part being is the subcontractor then declares the v80 and pays it to hmrc under missing trader fraud however the same process occurs so a subcontractor will invoice the main contractor including the 20 the main contractor will pay the invoice due again to the subcontractor the main contractor will reclaim the vat however the subcontractor will disappear without filing their tax returns and without paying any of the v80 to hmrc so this next slide just explains missing trader fraud in a slightly different way for you here we have invoice for 1 000 pounds plus 200 pounds v80 and in this example we aren't taking into account any cis deductions so the first step is the subcontractor will charge 1 200 pounds on their invoice the main contractor will then make that payment to the subcontractor the main contractor then recovers the vat as purchase tax from hmrc and the subcontractor will pay the vat due as a sales tax so the overall effect at hmrc is zero finally the subcontractor will bank the one thousand pounds net value under missing trader fraud the first few steps are the same so the subcontractor will still invoice the main contractor for the work completed the main contractor will pay the subcontractor they'll also recover the vat as purchase tax on their vat return the subcontractor however has gone missing leading to missing trader fraud leaving hmrc down by 200 pounds and leaving the subcontractor to bank the full value of the invoice in our example we've used typically low values as you can imagine in the construction industry these values can be much higher this is why hmrc are predicting this will cost up to 140 million in the year 2020 2021 so now let's take a look at the solution and how hmrc are intending to combat this missing trader fraud so this is where hmrc are introducing domestic reverse charge what this will do is it will transfer the liability from the suppliers at each level of the supply chain up to the final supplier who will then pay the vat domestic reverse charge technically applies to services but if you have an invoice which contains both cis and non-cis items then domestic reverse charge will still apply the reverse charge will apply what we term notional vat to the vat return so a notional vat affects both sales and purchases therefore there's no overall vat due on the vat return as you can see in our example here boxes one and four contain the same value therefore cancelling one another out leaving box five with no overall figure this notional vat allows hmrc to analyze the amount of v80 that would have applied if normal vat rules applied now our products will introduce features to automatically account for this for you and we will demonstrate that later for you so what does hmrc want to see occurring when processing domestic reverse charge transactions so first of all for your purchase invoices and purchase credits they would use reverse charge and implement the notional vat so the net amount would show in box seven and boxes one and four will hold that notional vat amount for your sales invoices and sales credits reverse charge will only impact book six with the net amount only so there's no notional vat at this point however if you're issuing an invoice to your customer the invoice must clearly state that the transaction is subject to reverse charge and either contain the value of that vat or the percentage rate of that bet hmrc have provided examples of the wording which meets the legal requirements and that is held on the link at the bottom of the page again that link will be found in your handout so reverse charge doesn't apply to supplies to end users or intermediary suppliers they are considered the end of the chain and normal vat rules must apply communication must be made and it must be in a written notification of end user or intermediary status and this can be made in writing via email or in a formal contract this was previously considered desirable but is now a requirement and this came into effect in june 2020 so next we're going to take a look at how to actually apply domestic reverse charge so this may appear to be nice and easy unfortunately there is a little more to it than simply applying domestic reverse charge to every single transaction you process under cis you actually need to understand where you fit into the supply chain so you know that whether or not domestic reverse charge applies if domestic reverse charge applies then move the liability up to the next business in the chain where they will have to do the same assessments so what you need to consider is is the service being supplied subject to cis is the supply subject to standard or reduced rate v80 for suppliers is the supplier v80 registered are your customers end users or are they providing onward supply of services what is the tax point of the transaction does that fall before or after the legislation change and also consider that only the end customer is going to be paying the v80 our next few slides should hopefully clarify this further for you you may have already determined your position in the supply chain in each of your contracts if not you may need to contact your customers and suppliers to confirm details such as if they're vat registered if they're within the construction industry scheme and in the case of your customers whether or not they're end users remember if you are an end user or you're dealing with an end user this needs to be confirmed in writing to help us today we are going to use this five step chain as an example and we're going to look at the domestic reverse chart from the perspectives of the three contractors in the middle of the chain these will all need to deal with domestic reverse charge in different ways in this example our sole trader is at the bottom of the chain and they're not that registered so domestic reverse charge does not apply to them the end users or customers at the top of the ladder are the final link and again quite often these may be individuals or not v80 registered to begin with we're going to start with the small subcontractor who receive an invoice from the sole traders and send customer invoices onto the larger subcontractor so what we will do is we will summarize the old process versus the new process under domestic reverse charge as mentioned before the sole trader that they're dealing with isn't vat registered therefore the purchase invoice they're receiving from them is treated in exactly the same way as it would be prior to the domestic reverse charge legislation coming into place the change for the small subcontractor comes when they need to send a customer invoice to the largest subcontractor the next one in the supply chain so first let's take a look at the old process so under the old process the small subcontractor would charge 20 v80 on their invoices that they're issuing to their larger subcontractor and they should pay that v80 to hmrc so in this example you can see that they've charged 110 pounds plus 22 pounds v80 and 22 pounds is due to hmrc under domestic reverse charge the customer invoice will need to show clearly that domestic reverse charge applies and show how much vat would have been paid under normal circumstances but it's not to be added to the total of the invoice this means that the small subcontractor is no longer paying vat to hmrc they are transferring that liability on to their customer in this case that is the larger subcontractor so next let's take a look at the steps for the larger subcontractor in our example these are those businesses in the middle of the chain who are affected by domestic reverse charge on both their customer and supplier invoices this large subcontractor uses small subcontractors but is also subcontracted themselves so when they receive their invoice from their subcontractor they recover from the purchase invoice 22 pounds of vet when they produce their sales invoice to their customer they charge 120 pounds plus 24 pounds v80 in this case that means that overall they pay 2 pounds of v80 to hmrc under the new process they will record notional reverse charge based on the purchase invoice their subcontractor has issued them as you can see here that will impact both boxes 1 and 4 of the vat return on the sales invoice they are sending to their customer they would charge the 120 pounds but this time with reverse charge v80 again indicating the reverse charge applies and not adding that to the total of the invoice again passing on this liability to their customer as you can see here this means that there is no overall vat due to hmrc finally let's look at the steps for the main contractor these are the businesses that are dealing with those end users and they have had either written confirmation of that or they are not cis or vat registered so these businesses are still not the end of the chain as they use subcontractors but they are in fact invoicing the end customer so again under the old process they would recover the 24 pounds vat charged by the larger subcontractor and on their invoice to their customer they would invoice 130 pounds plus 26 pounds v80 again this means that they would owe hmrc two pounds under the new process they will recall the notional reverse charge based on the vat that their subcontractor has issued to them as you can see again that's going to affect box 1 and 4 of the vat return the difference however is that because they are dealing with an end user normal vat rules apply and in this case they are actually charging the customer as normal so for 130 pounds plus 26 pounds vet this means because they are the final link in the chain for domestic reverse charge they are then paying the entire liability to hmrc this final slide here is a really good visual representation of the old process versus the new process once domestic reverse charge applies you may find it useful to maybe take a print out of this to help you through those early days understanding the impact on the supply chain there are some more considerations to take into account prior to this legislation coming into effect these may have wider impacts to your business so it is worthwhile considering these in advance so the first is that of cash flow and to demonstrate this i have used our small subcontractor from our example but this may impact any business no longer physically collecting vat this legislation could potentially impact the cash flow to your business particularly where you would collect vat on invoices and in some circumstances potentially not need to pay this for a further three to four months therefore businesses tend to use this as working capital in the meantime so we look back at our example of the small subcontractor you can see that they are collecting v80 of 22 pounds and they may not need to pay that for three months in the meantime they may use that to fund their businesses and to fund projects under domestic reverse charge they will no longer be collecting this v80 which means they may lose some of their working capital it's important to consider this change now and prepare for that in advance of the legislation coming into force at the other end of the spectrum this legislation could create what are termed repayment traders this is where they due to them no longer collecting and paying vat on their sales they're actually due a net reclaim rather than a net payment on their vat returns so an example of this would be perhaps a subcontractor who is providing a service which falls within the scope of domestic reverse charge but all of their purchases are materials therefore outside the scope of domestic reverse charge because vit is still charged on these items they can reclaim on their vat return businesses that this applies to can request to move on to monthly vat returns to speed up the repayments to them but you do need to contact hmrc if you wish to do this so the supply chain may take some getting used to but you should now grasp the importance of understanding your position in the supply chain here we've summarized some preparation steps for you first review supplies made to and received from other vat registered contractors to establish if these are subject to reverse charge second understand your customers and suppliers do your customers have an onward supply or are they the final link in the chain are your suppliers aware that they need to know how to apply domestic reverse charge to your invoices if they're vat registered consider the changes to your accounting system to deal with this change and consider the changes to the wording on your invoices where domestic reverse charge applies and finally consider the cash flow impact to your business so to help you distinguish where domestic reverse charge applies hmrc have actually produced two very useful flow charts one for if you're supplying services and one for if you're receiving services it may be useful for you to have these handy for yourself and your colleagues whilst you get into groups of this new legislation and we will use these when working through some examples in a few slides time so we're now going to move away from the theory and preparation and onto implementation and how to process this in sage 50 cloud accounts so let's take a look at the features we are providing you to support you through this legislation change first of all we're going to be introducing two new tax codes by default these will be t21 and t26 if they're already in use it will be the next available tax codes these tax codes will be available in version 26 and above so we have t21 this will be used for all standard rated transactions where domestic reverse charge applies we're also introducing t26 and this will be used for all reduced rate transactions where domestic reverse charge applies these tax codes are to be used on both customer and supplier invoices and as you'll see in our demonstration shortly these will take care of the reporting on the vat return for you all you need to do is determine whether or not domestic reverse charge applies to that transaction these tax codes should be set up automatically for you if you are using version 26 however if you do want to check them for your own peace of mind they should be configured as you can see on the screen at the moment in addition to these two new tax codes we've also added some conditional formatting to our standard invoice layouts so remember customer invoices must indicate the vat value or the vat rate that would have applied under normal circumstances this conditional formatting means that when either a t21 or a t26 tax code is used on an invoice it will automatically update the text on the invoice to indicate it is reverse charge supply and it will also show the total v80 that would have applied without adding it to the total so let's take a look at this and bring this to life with some examples so first let's take a look at how to record an invoice received from a subcontractor for work they've carried out on our behalf so the first thing we need to do before processing any transactions is work out whether or not domestic reverse charge applies to this transaction so we're going to use the hmrc flowchart that you can see on the screen to help us decide first if cis domestic reverse charge applies so question one is is the supply made by an employment business such as an agency in this scenario no they're a fellow tradesperson so we can move on to question two is the supply received within the scope of cis again in this case they are supplying services subject to the construction industry scheme question three is the supply standard rated or reduced rated for the purpose of the demonstration we're going to say standard rated if the transaction had been zero rated or nonbattable then you would have processed these in the normal matter normal vat rules would apply step 4 have i confirm with my supplier that i am an end user in this case no we are not the end user in the supply chain we are going to be providing onward services so therefore in this case domestic reverse charge does apply to this transaction so we know in that case that this transaction needs to impact boxes 1 4 and 7 of the vat return next we need to check the invoice we've received is correct it's up to us receiving the invoice to ensure that you are receiving correct invoices under this new legislation if you've been invoiced incorrectly for example charging v80 when you should have had domestic reverse charge applied you need to inform the supplier and ask them to reissue the invoice in this example the invoice has been completed correctly the invoice clearly states that domestic reverse charge applies and it also shows the total vat value to be passed on without charging this value in the total of the invoice now we know we can accept the invoice let's take a look at how to process within sage 50 cloud accounts and how this affects the vat return so first of all we're going to enter the invoice as a batch invoice adding t21 to the transaction with this being a cis transaction ensure that you use the cis nominal codes as you'll notice there we're applying t21 to both the labor and the materials on this invoice so once we've saved that let's take a look at how that impacts the v80 return as you can see here using that t21 has impacted both boxes 1 and 4 with the vat value and box 7 now holds the value of the net element of that invoice if we use the drill down functionality you'll then be able to see the t21 has also been added to the drill down feature so now we've seen how to process this for our supplier invoices let's take a look at how to process this for our customer invoices again our first step is to determine whether or not domestic reverse charge applies to this transaction and we're going to use the hmrc flow chart to help us decide this so step one is does the supply fall within the scope of cis again in this example we are receiving services subject to the construction industry scheme step two is the supply standard or reduced rate again in this example we're going to use standard rated if the item was zero rated or non-vatable again these would just be processed as normal as the normal vat rules would apply step three is the customer vat registered so in this example the customer is registered for both v80 and cis so that takes us on to question five has your customer provided confirmation that it is an end user so our customer is not the end user in this case again if they are the end user and you've received written confirmation the invoice would be processed as normal under the normal vat rules so again we have determined that in this case domestic reverse charge does apply to this transaction and this transaction needs to affect boxes only on your vat return so this time we are issuing the invoice and when we are processing the transaction we need to make sure that it is sent out correctly so we need to record on the invoice the amount of vat that would have been applied under normal circumstances we also must indicate that the supply is subject to domestic reverse charge the vat value must also not be added to the overall total of the invoice now luckily that's not something you need to worry about because when you process your transaction using a t21 this wording will automatically be added for you as we'll demonstrate for you in just a moment so let's observe how to process this within sage 50 cloud accounts first of all we need to produce the invoice from within the invoicing module for the purposes of this session i'm going to do a service invoice and that just allows me to free type into the boxes so as you can see here i've applied a default tax code to my customer of t21 because i know that domestic reverse charge will always apply so it's automatically pulling through those defaults for me so again i'm popping my labor and my materials both on a t21 so we're going to save that and then we're going to have a look at what that looks like when we print this on one of the standard layouts so as you can see here it indicates the reverse charge and it also shows the vat value that would have been applied on the normal circumstances i'll update the ledges and then we'll check out the vat return and again within the v80 return the only box that's impacted is box six of the vat return with the net element of that invoice so to assist you when determining where domestic reverse charge applies we have some additional letters available for you to and use both of these letters can be found in our cis help center or via the link on the bottom of the page our subcontractors letter allows you to confirm your vat and cis status and also indicate that you require incoming invoices for services that fall into scope to be reverse charged our main contractor letter helps you gather that information you require from your main contractors such as their vat status their end user status and whether or not they're in an intermediary supplier so once installed these will sit in either your customer or supplier modules and these can be customized to suit your business requirements it's important to note that these letters are only available in sage 50 cloud accounts so let's now summarize the process within sage 50 cloud accounts in terms of implementation the key is understanding whether or not domestic reverse charge applies to that transaction use the hmrc flow charts to help you understand whether or not domestic of reverse charge will apply but for your supplier invoices if you're processing a transaction and it is subject to reverse charge remember by default t21 is used for your standard rated items and t26 for reduced rated items by using these tax codes the vat return will be impacted correctly for you remember if these codes are already in use the next available codes will be used instead and for your customer invoices again if they are subject to domestic reverse charge t21 for your standard rated items and t26 for reduced rate again using these tax codes will ensure that the vat return is impacted correctly and it will also update the wording on your standard layouts standard layouts can easily be amended to add on logos and also layout preferences so that sums up the new features and how to process in stage 50 cloud accounts so now let's take a look at how this will work in stage business cloud accounting for our sage 50 customers please do bear with us as these slides won't apply to you please bear in mind this is a first look at these new features in sage business cloud accounting so they may be subject to small changes prior to implementation so first let's take a look at this from a supplier point of view supplier records within stage business cloud will be updated to include a reverse charge checkbox this will be visible on both existing suppliers and when creating a new supplier record when a supplier has cis details entered and the vat number has been added this checkbox will be automatically selected domestic reverse charge will then be applied on all future invoices however this can be overridden on an invoice by invoice basis so let's take a look at how to implement that on a supplier invoice in this example here i've selected a cis and vat registered supplier and the invoice date is falling after the 1st of march as you can see there is a tick box on the invoice itself that can be deselected if this particular invoice does not fall under domestic reverse charge rules however because this is selected reverse charge v80 has been calculated but not added to the total of the invoice the banners in the invoice will be updated to indicate that invoice includes reverse charge also once this invoice is saved it will ensure that notional vat is applied to the vat return this means that the vat value will impact boxes 1 and 4 and box 7 will show the net element of the transaction so let's now take a look at domestic reverse charge if you need to produce customer invoices just like we saw with suppliers we have the vat reverse charge check box within existing customers and also when creating new customer records the same rules apply if the cis details and the vat registration number have been entered then this will be automatically selected this can be deselected if you know domestic reverse charge will not apply for example if you know that you're dealing with the end user so now if we create an invoice dated after the 1st of march where the customer has the v80 reverse charge checkbox selected you can see some changes first the wording in the banner indicates reverse charge has been applied the used reverse charge on this invoice checkbox is selected now remember this can be deselected if domestic reverse charge does not apply to this particular invoice finally the reverse charge is calculated but not added to the overall total of the invoice this means when you produce your v80 return the net value will appear in box 6 of the v80 return only do bear in mind as you mentioned earlier once the tick box is selected to apply domestic reverse charge to the invoice it will apply to the entire invoice within sales domestic reverse charge can also be applied to codes and estimates and this will carry over into the invoice once they are converted when it comes to printing or emailing these invoices our layouts have been configured to display the reverse charge value whilst not adding it to the total they will also contain the correct domestic reverse charge wording for you finally just a couple of other additional considerations when processing domestic reverse charge on sage business cloud accounting users can create recurring invoices with domestic reverse charge applied it will be important to review any existing recurring invoices after march the first just to ensure that the correct vat is being applied finally domestic reverse charge cannot be applied to quick entries so that now brings us to the summary for today's session so first of all in terms of preparation business should review the supplies are made to and from other vat registered contractors and establish whether these are subject to reverse charge you'll need to consider changes to your accounting system so make sure if you're using sage 50 cloud accounts that you're using version 26 or above and also consider the cash flow implications to your business we are just going to touch on some common questions we do have a dedicated common questions section purely on cis which can be found on our help center i would recommend you keep an eye on this over the next few months as it is updated regularly so the first question we've got there is what if my invoice contains materials and labor so if the materials are used as part of the supply of services then the reverse charge will still apply and we showed that in our examples today what if i use back cash accounting or flat rate v80 so transactions subject to reverse charge are actually excluded from these schemes also if you're using flat rate you may need to consider whether it's still beneficial to remain on a flat rate scheme question three what my project spans the 1st of march and for this you'll need to consider the tax point so if your tax point falls prior to the 1st of march then normal vat will apply if the tax point falls after the 1st of march 2021 then domestic reverse charge rules will apply for further information on those last two questions i would point you in the direction of the gov.uk site or check for further updates on our help center i just want to take the last few moments just to show you some further support and training we have lots of on-demand webinars and also recordings available on our help center we also have free e-learning available on sage university and also we have lots of resources available on our sage help center so as i mentioned earlier stage university is offering free e-learning the link is on the screen there at the moment and we do have a dedicated module for cis domestic reverse charge within there we also have our help center which is our central hub for all help and support across all aspects of our software but we also have a dedicated cis page within me so that brings us to the end of our session today on domestic reverse charge 4cis all that's left for me to say is thank you very much for joining us take care and stay safe