VAT Reverse Charge

Not VAT Registered? The VAT Reverse Charge could still apply, so stick with us.

Note that this is separate to the VAT Reverse Charge for Construction.

The Reverse Charge is the way you account for non-UK services you receive. The Reverse Charge is the amount of VAT you would have paid on that service if you had bought it in the UK.

Invoices from non UK businesses are not always clear on the VAT treatment of the service provided and we have seen an array of different treatments in our clients accounting software. Not accounting for the Reverse Charge correctly can lead to incorrect VAT Returns, over/underpayments, and possible surcharges.

 

When does it apply?

The VAT Reverse Charge only applies where services are supplied in the UK by a supplier belonging outside the UK.
If a non-UK business supplies services to a UK business they do not charge UK VAT, instead the recipient of the services in the UK is liable to account for the VAT as both a sale and a purchase. Yes, you read that right, the UK VAT registered business treats the service as a sale and a purchase.

This saves non-UK businesses from having to register for VAT in the UK.

Services provided by a UK business to another country which, under the “place of supply” rules, are considered to be supplied in another country, are outside the scope of UK VAT and are only subject to tax in that country.

 

Examples

Examples include:

• customised software on a disc from a USA business (B2B general rule service) – the place of supply is the UK and the UK business must account for VAT under the reverse charge.
• a supply of legal services from a French business (B2B general rule service) – the place of supply is the UK and the UK business must account for VAT under the reverse charge.

Common suppliers used by our clients, which should apply the Reverse Charge:

• Google
• Zoom
• Loom
• Big Commerce
• Facebook
• Adobe

Accounting for the Reverse Charge

When you receive an invoice from a supplier, it may state “Reverse Charge” to help you know how to account for it.

It may seem strange to account for the service as a sale AND a purchase but, when you think about it, there is logic.

By accounting for the sale (Box 1 and Box 6) and the purchase (Box 4 and Box 7) the net affect is NIL. As the UK business has not paid any VAT on the supply it is the same net effect as if they had purchased the item from a UK business. If it was a UK business, it would pay an extra 20% on the invoice only to claim that back and only pay the net, the same scenario as buying from outside the UK.

In Xero there is a Tax Rate called “Reverse Charge Expenses 20%” to which you will need to post these invoices and this makes the process easier. However, you will need to ensure the reverse charge is applicable before using this tax rate.

 

Do I need to register for VAT?

If you buy in services from outside the UK you may not be aware that these count as part of your taxable turnover (unless the supply of service is an exempt supply) for VAT Registration purposes.

If you had sales of £65k during a 12 month period, at first glance you would be below the VAT registration threshold. But if you then purchased £20k of advertising from Google, your taxable turnover would be £85k and VAT registration would be required. This is why the Reverse Charge is important even if you are currently trading below the VAT threshold (thanks for sticking with us).

Related Note: From 01/04/2022 all VAT registered businesses will also be required to register for Making Tax Digital (MTD) regardless of if their taxable turnover amount is below £85k. See more here.

It’s a lot to take in so why not let us worry about the ever-changing world of bookkeeping and tax while you enjoy additional peace of mind and free-up valuable time to spend on the things that matter most to you – like growing your business or spending more time with family?

Any questions? Get in touch and we’ll be happy to help.