How to create a domestic reverse charge VAT invoice
In the UK, workers in the construction industry have strict rules to follow when invoicing and accounting for their income. The Construction Industry Scheme (CIS) was developed to ensure that all construction workers are correctly reporting their income and paying the correct amount of tax.
As of 1 March 2021, most workers who are registered for the Construction Industry Scheme will need to apply the domestic reverse charge VAT for supplies of building and construction services.
This article explains what the domestic reverse charge is, how to create a reverse charge invoice, and how to be compliant with the Construction Industry Scheme (CIS) regulations. A sample domestic reverse charge VAT invoice is also provided.
The Construction Industry Scheme (CIS) was first launched in 1999 to reduce tax evasion in the construction sector. Over the years, it has evolved into specific methods of invoicing, accounting, submitting tax returns, collecting payments, and submitting VAT returns. Compliance tests are run regularly by HMRC to confirm a construction company’s turnover.
The domestic reverse charge VAT is a new anti-fraud measure that changed the way that construction businesses account for VAT.
Prior to 1 March 2021, the supplier would account for VAT from sales on their VAT return. After 1 March 2021, the supplier must issue a domestic reverse charge invoice and the buyer will account for the VAT on their VAT return.
Importantly, no VAT is actually being charged on these sales. On their VAT Return, the buyer enters the output VAT and input VAT that cancel each other out. This way, HMRC will be able to view these transactions, but the VAT is not charged.
There are specific rules for when you can and cannot apply the domestic reverse charge to your sales. You’ll need to apply the domestic VAT reverse charge if:
Your business and your customer are registered for VAT in the UK
Your business and your customer are registered for the Construction Industry Scheme (CIS)
The construction services you supply are standard or reduced rate (doesn’t include zero-rated or exempt services)
The customer is not the end user or intermediary supplier
The services are covered by the Construction Industry Scheme
If all of these criteria apply to the sale, then you’ll need to complete the following to ensure that your being compliant with the regulations:
Check that your customer’s VAT number is valid
Check your customer’s CIS status
Check that the customer is not the end user or intermediary
It’s important to make these checks before invoicing the customer. If the customer’s VAT number is invalid or they are no longer registered for CIS, you’ll need to issue a different type of invoice.
In addition to the previously mentioned criterion, it’s important to note that the domestic reverse charge doesn’t apply to all construction services. Some construction services that are excluded from the Construction Industry Scheme are:
Architect, landscaper, surveyor and decorator services
Manufacturing machinery and systems for construction
Drilling or extraction services
There are a variety of other services that aren’t included. If in doubt, you should contact HMRC or your accountant for guidance.
Since invoices are an official request for payment, they need to include certain fields to be valid. VAT invoices, including domestic reverse charge invoices, require additional VAT fields for reporting purposes. On top of that, CIS domestic reverse charge invoices also need to include specific CIS information to be compliant with CIS regulations.
CIS domestic reverse charge VAT invoices must include the following information:
Your business name, address, and VAT number (VRN)
The buyer’s name, address, and VAT number (VRN)
A unique invoice number
The invoice issue date and the date of supply
The description, quantity, and net price of each product or service
The VAT rate of each product or service
Any discounts (if applicable)
The subtotal excluding VAT
The total amount of VAT
The CIS deduction (if applicable)
The total amount due
A reverse charge reference (E.g. Reverse charge: Customer to pay the VAT to HMRC)
The majority of the fields listed above are standard for all VAT invoices. However, the CIS deduction and the reverse charge reference are unique to domestic reverse charge invoices.
The CIS deduction refers to an amount deducted from a subcontractor’s invoice that the contractor passes along to HMRC for tax purposes. This is to ensure that the subcontractor is paying the correct amount of income tax and National Insurance contributions.
The reverse charge label is added to ensure that the buyer is aware that they need to account for the VAT on the sale. It should also clearly state how much VAT (in GBP) the buyer should report on their VAT Return.
Below, you’ll find a sample domestic reverse charge VAT invoice. It includes all of the mandatory invoice fields, as well as the CIS deduction and reverse charge reference.
If your business is required to create domestic reverse charge invoices, there are a variety of ways you can do this. Most established businesses prefer to use invoicing software to quickly create compliant invoices. Other construction businesses opt to use Word or Excel to create their invoices.
If your business uses Word or Excel, you can download our free invoice templates for construction services. Bear in mind that you may need to calculate the totals manually and also keep track of any changes in regulations.
Invoicing software, on the other hand, automates a lot of the entries for you. For example, the invoice numbers, VAT, and totals will be calculated automatically. You can also upload item and customer lists for quick selection.
Most invoicing software is updated regularly to reflect changes in invoicing regulations and VAT rates. You can simply enter the details of the sale knowing that your invoice will always be compliant.