Reverse charge VAT 4: How to manage the change
>> VAT Reverse Charge comes in on the 1st March 2021 <<
In this Reverse charge VAT series we've so far covered what its, what is changing, and how it will impact those it relates to.
In this blog I'd like to give you some more context around it's effect, and how you can manage it.
Mr Contractor pays Michael the net £100,000 fee. It then accounts for output and input VAT of £20,000 on the supply on its own VAT return.
Michael does not account for output VAT in his accounting system as he has invoiced only his £100,000 fee.
As a consequence of the reverse charge procedure, Michael charges and receives £20,000 less than under the old system (where he would charge £100,000 + VAT). He does not have to account to HMRC for any output tax on the transaction.
When he is paid by the contractor he includes the value of the sale in box 6 of his VAT Return. He does not add VAT to box 1 as he receives no output VAT.
The change will impact Michael cash flow, as under the old rules, if Mr Contractor was a prompt payer he could use the £20,000 in VAT to purchase his materials. He could then offset the input tax paid against his output liability.
Mr Contractor has a cash flow advantage, it does not have to pay Michael £20,000 and then at the end of its VAT quarter it cannot reclaim £20,000 as it is accounting for the reverse charge and the output VAT offsets the input VAT.
As Mr Contractor is supplying CIS services it must also consider the reverse charge. Will its client (Ms Developer) be involved in the onward supply of CIS services? In this case, it may be difficult to determine as apparently Ms Developer is selling the finished building to an end-user as an investor and the reverse charge does not apply. It becomes Ms Developer's responsibility to notify down the supply chain.
To help support this change, from 1 March 2021, providers such as QuickBooks and Xero will have two new VAT codes (20% and 5%) that customers will be able to use to account for the VAT reverse charge.
Once the code has been selected and the transaction saved, QuickBooks will automatically account for the reverse charge and the VAT will be reflected on your VAT return; you do not need to amend or adjust your return.
If you're new to cloud software providers such as Quickbooks and Xero, Business Buddies can set you up and train you on the systems.
Or else we'd be happy to do it for you.
But above all else, I hope the above example provides some clarity on the Reverse charge VAT circumstances.
For more detailed information on the changes please refer to HMRCs website.
Or else take just 2:09 to watch our video.
P.S. Don't forget to look back at some of our other articles in the Reverse charge VAT series: