The VAT domestic reverse charge procedure is a new way of accounting for VAT in the construction industry, and it came in to force on 1 March 2021.
Key features of the new Domestic Reverse Charge for Subcontractors
If you are a subcontractor doing work for another contractor then you no longer charge VAT on the work done (subject to all the normal CIS rules which are not covered here) but you still have to account for the sale in your VAT return, and inform your contractor that they must account for the VAT instead.
As you would expect, Xero have made accounting for these new procedures simple; you just need to use a new VAT code in Xero, so instead of the usual “20% (VAT on income)” VAT code on your sales you need to use “Domestic Reverse Charge @ 20% (VAT on income)” VAT code, and this will ensure all the correct boxes are completed for your VAT return.
Key features of the new Domestic Reverse Charge for Contractors
If you are the end contractor with subcontractors doing work for you, then you will need to account for the VAT on all your subcontractors work done (again subject to all the normal CIS rules which are not covered here).
In accounting for your subcontractor purchases in Xero you need to use a new VAT code in Xero, so instead of the usual “20% (VAT on expenses)” VAT code on your purchases you need to use “Domestic Reverse Charge @ 20% (VAT on expenses)” VAT code. This will then ensure that all the correct VAT boxes are updated on the VAT return (i.e. including the subcontractor output VAT on your VAT return and reclaiming the input VAT on your VAT return as normal).
The new VAT codes for both subcontractors and contractors are already available in Xero, but you will need to switch them on. Go to the accounting tab, advanced, tax rates, and click on the ‘Add Domestic Reverse Charge Rates’ to do this.
Xero has more details, including an example of what the new invoices will look like, at –
If you have any queries please contact one of our Xero champions for further guidance.
If you know anyone who may benefit from our newsletters and updates, please feel free to forward this email or ask them to opt in to our mailing list.