UK Domestic Reverse Charge scheme

HMRC Domestic Reverse Charge scheme

Introduction.

From 1st March 2021, the HMRC Domestic Reverse Charge scheme comes into effect for many UK businesses. If you are a VAT registered business that needs to apply the scheme, here is what to do.

Both contractors and sub-contractors will need to use new VAT codes. these can be added to your application by following the easy steps detailed below.

Adding a 20% contractor VAT code.
  1. Go to 'Settings'
  2. Then 'VAT settings'
  3. Then 'VAT rates'
  4. Select 'Add'
  5. Enter the required details for the VAT code you will need:

VAT code name:
CONS
Description:
Contractor standard rate VAT code
What transactions will this be used for:
Purchases
VAT account for purchases:
Set to 'VAT Control Account'
Status:
Set to active so that the VAT code can be used.
Export code:
Can remain blank.
VAT rate:
20%
VAT liability section:
Standard
  1. Enter the following 'report labels':

Report label

Amount to include

Transaction type

1

VAT amount only

Purchases

4

VAT amount only

Purchases

7

VAT exclusive amount

Purchases

  1. Save & close




Adding a 5% contractor VAT code.
  1. Go to 'Settings'
  2. Then 'VAT settings'
  3. Then 'VAT rates'
  4. Select 'Add'
  5. Enter the required details for the VAT code you will need:

VAT code name:
CONR
Description:
Contractor reduced rate VAT code
What transactions will this be used for:
Purchases
VAT account for purchases:
Set to 'VAT Control Account'
Status:
Set to active so that the VAT code can be used.
Export code:
Can remain blank.
VAT rate:
5%
VAT liability section:
Standard
  1. Enter the following 'report labels':

Report label

Amount to include

Transaction type

1

VAT amount only

Purchases

4

VAT amount only

Purchases

7

VAT exclusive amount

Purchases

  1. Save & close




Adding a 20% sub-contractor VAT code.
  1. Go to 'Settings'
  2. Then 'VAT settings'
  3. Then 'VAT rates'
  4. Select 'Add'
  5. Enter the required details for the VAT code you will need:
VAT code name:
SUBS
Description:
Subcontractor standard rate VAT code
What transactions will this be used for:
Sales
VAT account for purchases:
Use the default account
Status:
Set to active so that the VAT code can be used.
Export code:
Can remain blank.
VAT rate:
20%
VAT liability section:
Standard
  1. Enter the following 'report labels':

Report label

Amount to include

Transaction type

6

VAT exclusive amount

Sales

  1. Save & close




Adding a 5% sub-contractor VAT code.
  1. Go to 'Settings'
  2. Then 'VAT settings'
  3. Then 'VAT rates'
  4. Select 'Add'
  5. Enter the required details for the VAT code you will need:

VAT code name:
SUBR
Description:
Subcontractor reduced rate VAT code
What transactions will this be used for:
Sales
VAT account for purchases:
Use the default account
Status:
Set to active so that the VAT code can be used.
Export code:
Can remain blank.
VAT rate:
5%
VAT liability section:
Reduced rate
  1. Enter the following 'report labels':

Report label

Amount to include

Transaction type

6

VAT exclusive amount

Sales

  1. Save & close




Accounting for Domestic Reverse Charge payments made as a contractor.

If you are a contractor, you will pay sub-contractors bills with no VAT included. To account for this and the remaining balance, follow these steps.

  1. Go to the outstanding sub-contractor bill, choose 'Make payment' and record the payment made to the supplier in the usual way.
  2. Raise a credit note for this supplier for the amount remaining on the bill (this should be the VAT amount) and using the 'VAT Control Account' in the 'Account' field.
The credit note should be refunded and applied to the outstanding balance of the sub-contractor bill.

Following these 2 simple steps will ensure:

  • Your bills are correctly shown as paid.
  • Your VAT return is correct.
  • Your accounts are accurate.

Additional text needed on sub-contractor invoices.

Remember to add text to your invoice that states 'Customer to account to HMRC for the reverse charge VAT.'

How did we do?

XML VAT return submissions

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