Here's how you can invoice a contractor for labour under CIS rules while applying the Domestic Reverse Charge VAT rate:
1. Confirm Key Details
Before creating the invoice, ensure the following:
- You and the contractor are VAT-registered.
- The service provided is within the scope of CIS.
- The contractor is not an end-user (an end-user is someone who consumes the building work and doesn’t supply it on as part of further construction).
2. Enable the Domestic Reverse Charge VAT Rate
- Go to Settings > Manage VAT Rates.
- Find the Domestic Reverse Charge VAT option and enable it.
3. Create the Invoice
Step 1: Add Invoice Details:
- Navigate to the Invoicing section.
- Add the contractor's name.
- Set the date and preferred payment method
Step 2: Itemise the Labour:
- Press 'Add product or service' to add the labour service as a line item.
- Name: "Labour Services (CIS)"
- VAT Rate: Select "Domestic Reverse Charge VAT." - This ensures that VAT is not added to your invoice total, and the contractor will account for VAT on their VAT return.
- Save the product or service.
Step 3: CIS Deduction:
- Add the CIS deduction as a separate line (negative amount):
- Labour total before CIS: £800
- CIS deduction at 20%: -£200
Step 5: Add a Reverse Charge Note
- Include the following note in the 'Document note' section for clarity:
"Reverse charge: VAT is not charged. The recipient must account for VAT to HMRC under the domestic reverse charge rules for building and construction services."
Step 6: Final Invoice Total
The total should reflect:
- The labour amount before VAT and CIS.
- The deduction for CIS.
- No VAT included in the total, as the contractor will handle VAT.
3. Record the Invoice in BFA
When you create the invoice, BFA will record:
- The gross amount (before CIS) as your income.
- The CIS deduction as a separate entry.
- VAT at 0% under Reverse Charge VAT.
4. Contractor’s Responsibility
The contractor will:
- Deduct the CIS amount and pay it to HMRC.
- Account for the VAT under the domestic reverse charge on their VAT return.
To reconcile a CIS payment:
Example:
- Invoice amount: £3,400 (no VAT)
- CIS Tax Deduction: £680
- Actual net amount in the bank: £2,720
To reconcile this example:
- Locate the transaction from your Bank Transactions page
- Categorise the first part of the transaction
- Apply the appropriate VAT rate
- Press 'Add Customer'
- Create a new category for CIS
- Apply the 'UK Domestic Reverse Charge' VAT rate, refer to this guide to enable this rate: UK VAT rate guide
- Increase a portion of the transaction by adding the 680 to the -2720, which will give you the result you are expecting of £3400
The Sales Receipt will show the CIS deduction:
Below is the gross value of the expense:
Your VAT return will accurately display the VAT expected:
Example 2
- Gross invoiced amount: 2627.00
- CIS deduction: £90
- Balance paid: £2537.00
To create a customer invoice for a CIS deduction:
- Enable the relevant VAT rate (UK domestic reverse charge no VAT): UK VAT rate guide
- Create your invoice with the gross amount
- Enter 'CIS Deduction included' in the 'description'
- Finalise the invoice by downloading it
- Go to the 'Customers' page
- Open the same customer
- Press 'New Actions' > 'New Credit Memo'
- Add a new product/service called 'CIS'
- Populate the details of the credit memo
- Apply the correct reverse rate VAT rate
- Press 'Done' and finalise your credit memo by downloading or emailing it to the customer
- Locate the invoice from your invoices page
- On 'Page 2' of the invoice, press 'Use a credit note':
- Once selected, press 'Done' to save
- Go to your bank transaction and press 'Split/Attach' to match the invoice to the payment
- Your VAT return will report the gross payment along with the CIS deduction in the credit memo