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On March 1st, 2021, HRMC introduced a new system to handle the way VAT is handled within UK construction services. This guide will detail these changes so you know if this requires your business to take action?
Are invoices legally binding?
How to identify business processes that can be automated
What is a credit note and when should you issue them?
Do Domestic Reverse charges affect your invoicing system?
Why lead management is important for any business
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As of 1st March 2021, HMRC underwent an integrity change with the way they handle VAT for construction services within the UK by introducing domestic reverse charges. This will have implications for almost everyone working within this industry, but this new ruleset does not apply when merchants are specifically supplying another trading company. This guide details the implications of this new system, who it impacts, and ultimately will inform you of any relevant changes to be aware of when preparing to issue these new types of invoices.
A domestic reverse charge is a new way to deal with VAT when two different UK VAT registered construction companies trade goods. The domestic reverse charge has been created as an additional factor to the existing construction industry scheme that was already in place. The basis for this change was to ensure that VAT is being documented and reported correctly between construction trade members and the HMRC. A change of this nature is likely to affect most contractors and subcontractors that are VAT-registered.
Previously, the supplier was accountable for ensuring VAT was included in a bill of sale. However, the buyer will now need to account for the VAT on their annual VAT returns. This was no doubt done as a countermeasure for concurrent tax issues. The main issue is known as missing trader fraud. This occurs when a company sets up a construction business, charges VAT to the customer, then purposely ceases to trade before tax is due to HMRC. This has acted as a legal loophole for some time and has enabled individuals to essentially pocket the taxed amount when it doesn't belong to them. Ultimately, this is fraud and the new rule is designed to significantly reduce the possibility of this going unnoticed.
As a result, the VAT required will be asked from the subcontractor- meaning instead of paying the taxable amount as part of the invoice, it will be asked instead that the subcontractor will record the sale and adhere to the tax changes after the fact. Essentially, this implies that if the bill of sale was £1000, instead of charging the customer the £1000 + VAT at 20%, they will be charged only £1000 for the sale and be expected to follow this up with HMRC to pay the accounted for tax.
The first step to take in this case is to check if this is relevant to you. All businesses that provide the following services must account for the reverse charge:
A DRC-rated invoice would follow many of the generic rules applying to invoices, with small changes to the tax rate applied. Your invoice should still include all of the mandatory fields found on a standard VAT invoice. This features your business information, as well as the customer's invoice/delivery information. As usual, include an invoice number, your description of goods or services supplied, and finally, a breakdown of the VAT due to HMRC. This should now include a more in-depth breakdown of the VAT required, whilst still including the old CIS' deduction that always applied to the construction sector. In total, this will be the deduction from the sale that is now owed to HMRC as tax. This is typically displayed on the DRC invoice within the breakdown of goods supplied, below the subtotal, but usually before the total amount due to the supplier.
Finally, the last piece of information to include is a line of text making clear that this invoice includes a reverse charge. This can be done by simply labelling the invoice with reverse charge included, or if possible, it can be included within the sales breakdown. However, currently, it is acceptable to not include this within the breakdown as long as the document is labelled correctly.
Below is an example of a DRC invoice layout after being run through the Zigaflow system. As shown below, you can see this invoice shares many of the same characteristics as a regular invoice of sale would. It includes the company details of the supplier as well as their logo, making it immediately clear who the source of this document is, and the customer's information for the delivery of this service. In this instance, the tax rate is zero to account for the reverse charge, but this must be made clear within the tax summary section at the end of the document. This makes It clear that the supplier is declaring the responsibility of the reverse charge onto the buyer.
We offer a variety of document templates for our customers to use. It is also possible to populate the templates with specific document tags, that when used, will autofill your company details, product lines, and product values. This eliminates the need for many manual tasks which will increase the efficiency of your invoicing workflow. Zigaflow's invoice module can alleviate the stress related to producing domestic reverse charge documents, book your demo today to see how we do it for yourself.
With an extensive background in business analysis and software programming, Tim heads up our software development team and loves nothing more than solving complex business challenges with simple easy to use software.
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The beauty of Zigaflow's quotation software is that it is intuitive, user friendly and can be modified to work around our business without compromise. In 18 months we have been able to increase our output of quotations by 300% and, with the inbuilt online quotation approval, our customers have been able to sign off on their quotations without any delays.
After trying many workflow systems and wasting many months and lots of money we found Zigaflow. Its been amazing in streamlining the work process and saving us countless hours of frustration. Support is first class and the company actually respond to feedback and make adjustments for the better, very refreshing. Keep it up!!!
With a national sales force, we needed software that can be accessed by everyone. The sales managers all raise the quotations, and they are signed off and sent by the admin staff at HQ, so we can ensure the correct components have been added and the quote is technically sound. We have reduced the requirement for additional admin staff as the quote is submitted as a request and then checked, rather than the sales force requesting a quote to be raised. I can see at a glance what the profit margin is on each quotation, I can also combine a couple of options onto one quotation by using sections, which reduces the number of duplicate projects on the system. Finally, the search function on the software is excellent; if I need to see all the quotes with a certain product on it this can be done in a matter of seconds without having to export to excel. Overall, I believe the implementation of this software has streamlined the quotation process and freed up time which would normally be spent on quotations to other areas of the business.
We subscribed to Zigaflow specifically to make our purchasing process more efficient. I highly recommend this app, the support is fantastic, and it really has saved us a lot of time. There is a lot more that we could potentially use it for, which the team at Zigaflow have demonstrated. It is very professional but also affordable.