How to raise a VAT reverse charge invoice for a customer using Okappy and Xero

From 1st March 2021, if you supply goods and services to the construction sector, then you will need to implement VAT reverse charging on your invoices.

Domestic reverse charge VAT legislation (DRC) is a change in the way Construction Industry Scheme (CIS) registered construction businesses handle and pay VAT. It is being introduced in the UK on 1 March 2021, having previously been delayed from October 2019.

Read on for step by step instructions on raising an invoice with a VAT reverse charge.

Set up a Xero Domestic Reverse Charge tax rate

From within Xero,

Go to the Account menu
Select Advanced

xero tax rates

Click Add Domestic Reverse Charge Tax Rates
Click Add Domestic Reverse Charge Tax Rates to confirm

xero domestic reverse charge tax rate

For more information, see Xero support.

Add/edit a product or service in Xero

To add or edit a product or service to include the VAT reverse charge

Go to the Business menu
Select Products and Services

xero items products services

Edit an existing Item, or select + New Item

xero items new item

Enter the details for your item including the Unit Price, Sales Account and Description
Select the new Domestic Reverse Charge rate you added previously.

xero items drc

Click Save

Set up your customer for CIS in Okappy

Set up your customer in Okappy as a CIS customer

Go to the Connections menu
Find the relevant customer
Click Account settings

Okappy customer account settings

Check VAT reverse charge
Enter the CIS rate

Okappy Customer VAT Reverse Charge

Raise your invoice and export to Xero

Raise your invoice for your customer
Select the item which you added in Xero

The tax rate will automatically update to show Reverse charge applied and the total VAT will be updated.

okappy xero raise vat reverse charge invoice

The final invoice will show that Reverse charge applies and that the customer to account to HMRC for the reverse charge output tax on the VAT exclusive price of items marked reverse charge at the relevant VAT rate as shown above.

invoice vat reverse charge