The Domestic Reverse Charge (sometimes called just “reverse charge”) is a VAT mechanism where the buyer (recipient) of a supply—rather than the supplier—accounts for the VAT on that supply.
In effect, the supplier issues their invoice without charging VAT (or shows VAT but marks it as reverse charge), and the buyer “self-assesses” the VAT (i.e. declares the VAT as output tax) and can also reclaim it (subject to the normal VAT input tax rules).
Add this text or similar to your DRC invoice document template:
“Reverse charge: VAT Act 1994 Section 55A applies” or “Customer to pay the VAT to HMRC”.
To make managing this easier, we recommend adding a customer tag 'DRC' or similar to remind your staff to use the correct document templates and tax codes.
How different accounting systems handle this varies, so how it is managed in Zigaflow must be tailored to each one.
Xero
Import the DRC tax codes from Xero:
-When creating an invoice, make sure that the line items have this code applied (use the Apply button to speed this up) and that the correct invoice document template is selected.
-The VAT will be shown as 0% on the invoice.
-When it is exported to Xero, the VAT will then be handled correctly by Xero.
FreeAgent
Manually create a tax code called 'DRC' or similar with a 0% rate in the Cog -> Settings ->Financial Settings -> Tax Codes:
We recommend creating an invoice pre-build called 'Reverse Charge Invoice'.
Open that pre-build and make the 'Reverse' control visible.
Set it to be ticked.
Create a document template for reverse-charge invoices and set it as the document template for this pre-build. It should include text along the lines of 'Reverse charge supplies'. To avoid confusion, you may wish to remove the variable and label for VAT from the invoice.
When you need to create this type of invoice from a Job/Sales Order, etc., select this pre-build
Set the tax code for all the items on this invoice to the DRC one that you have set up. You can use the Apply button to do this quickly.
When the invoice is posted to FreeAgent, it will be marked as a DRC invoice.
Learn more: customer invoices in Zigaflow