Domestic Reverse Charge: Digital links for Xero, QuickBooks and Sage users

The Domestic Reverse Charge (DRC) was introduced on 1 March 2021. This new reverse charge is the latest initiative to combat missing trader or carousel fraud that first appeared in relation to precious metals, computer chips and mobile phones. The DRC affects businesses that:

  • Buy or sell services that are ‘specified services’ that are reported within the Construction Industry Scheme (CIS)
  • The supplier and the recipient are both registered for VAT in the UK
  • The supply is standard rated or reduced rated
  • The supply is not to the end user or an intermediary

Supplies of zero rated construction services are not included within the DRC. For example, construction services on a new build house will be invoiced as normal under the current regulations.

Impact on the VAT return – suppliers

Under the DRC, suppliers that provide a specified service do not charge VAT on the invoice raised to the customer.

When the supplier completes the VAT return:

  • The net value of the sales subject to DRC (including credit notes) will be included in Box 6 of the VAT return as normal
  • No output tax will be declared in Box 1, as this output tax is accounted for by the customer

Output tax on services that are not included within the DRC will be declared on the VAT return as usual.

Impact on the VAT return – customers

Customers who receive a DRC invoice will account for the suppliers output tax in box 1 of the VAT return. The same amount of VAT is reclaimed as input on the VAT return, which creates a nil net result.

When completing the VAT return, Xero & Quickbooks will automatically:

  • Enter the tax on purchases subject to DRC, including any reductions due to credit notes, in Box 1 of the return
  • Reclaim the input tax on the DRC purchases in Box 4, subject to the normal rules. This includes any reductions due to credit notes
  • Enter the net value of the purchases under DRC (including credit notes) in Box 7

Please see the next page for details on how each software will cope with the changes and how to apply these.

Domestic Reverse Charge: Digital links for Xero, QuickBooks and Sage users

Xero users

To support DRC, Xero has specific tax rates to use on invoices and bills in order to report the correct amounts on the MTD VAT Return. The non-MTD VAT Return in Xero doesn’t support the DRC, so you need to set up MTD for VAT if your organisation doesn’t currently use it.

The DRC tax rates are:

  • Domestic Reverse Charge @ 20% (VAT on Expenses)
  • Domestic Reverse Charge @ 20% (VAT on Income)
  • Domestic Reverse Charge @ 5% (VAT on Expenses)
  • Domestic Reverse Charge @ 5% (VAT on Income)

The VAT Cash Accounting Scheme cannot be used where services are subject to the reverse charge, so DRC transactions are always reported on an accrual basis.

The Flat Rate VAT report in Xero does not support DRC, so transactions need to be manually added using the reverse charge provisions. Contact us for support on how to record DRC transactions under the Flat Rate VAT Scheme in Xero. Our contact details are set out at the end of this article.

How to add the DRC tax rates

  1. In the Accounting menu, select Advanced
  2. Click Tax rates
  3. Click Add Domestic Reverse Charge Tax Rates
  4. Click Add Domestic Reverse Charge Tax Rates to confirm

Quickbooks

From 1 March 2021 QuickBooks will have two new VAT codes (20% and 5%) that clients will be able to use to account for the VAT reverse charge. Once the code has been selected and the transaction is 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 are an existing client and have enabled VAT and CIS, then you do not need to set up anything. You will only need to enable and select the VAT code to apply it to invoices or bills.

How to add the DRC Tax codes

The codes will be available for activation on 1 March 2021 onwards.

First make sure VAT is set up and CIS is turned on in QuickBooks. Then go to your Taxes page and follow these steps to activate the code in QuickBooks:

  1. Go to Edit VAT
  2. Select Edit Rates
  3. Select the gear icon above VAT codes
  4. Click Include Inactive
  5. Use the toggle on the codes that you want to activate in QuickBooks

How to turn on CIS

  1. Click the Gear icon > Company Settings (or Account and Settings depending on what you see)
  2. Click Advanced
  3. Select Construction Industry Scheme (CIS)
  4. Enter your info

Sage users

Sage have now updated their software and added two new tax codes T21 and T26 but these are only being added to Sage 50cloud Accounts v26 and higher. If you are on one of these and don’t have the new codes check to see if there are any updates available. If you are on lower version than v26 the new codes will need to be created manually.

New tax codes

Two new tax codes have been created in Sage 50cloud Accounts v26 and above:

  • T21 to be used where CIS Reverse Charge Standard Rate applies
  • T26 to be used where CIS Reverse Charge Reduced Rate applies

These tax codes can be used by both the subcontractor and the main contractor and ensures that the VAT Return is updated correctly. These must be used for both your sales and purchase transactions, where domestic reverse charge applies. If tax code T21 or T26 is already in use, the next available tax code is used.

What if I do not use Sage 50cloud Accounts v26 or above?

If you do not use Sage 50cloud Accounts, you’ll need to manually create the reverse charge tax codes. For more information about creating tax codes please contact us.

  • Your new standard rate reverse charge tax code should be linked to T1 and flagged as Reverse Charge
  • Your new reduced rate reverse charge tax code should be linked to T5 and flagged as Reverse Charge

Further information

Our fact sheet sets out detailed information regarding the domestic reverse charge.

You can also watch a recording of our recent webinar which provides further explanation and guidance.

For advice on the Domestic Reverse Charge please contact:

Jonathan Main, Indirect Tax and VAT Partner, jonathan.main@mooreandsmalley.co.uk or 01772 821 021

Carolyn O’Shea, Indirect Tax and VAT Manager, carolyn.oshea@mooreandsmalley.co.uk or 01772 821 021

For advice on your accounting software please contact:

Digital Solutions Team, digital.solutions@mooreandsmalley.co.uk or 01772 821 021