Reverse Charge Mechanism

Reverse Charge Mechanism

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Hi,

I could do with some guidance on the reverse charge mechanism and how it is accounted for.

I will start with my understanding and finish with my questions:

Understanding

Reverse charge is a means to allow other EU registered companies to trade in the EU without having to register for vat.

As part of this mechanism the receiving company (the customer) is responsible for the sales tax, but they can claim it back as it is added to both input and output vat and essentially contra's.

My question are as follows

First Question

The output vat for EC sales relating to reverse charge is shown separately on the vat return, but over all contra's with the same value absorbed into total input vat. I think this is done so that HMRC has visibility of the reverse charge value and do they then reclaim that from the member state?

Apologies if this is a bit vague I am trying to move beyond filling in boxes and try to get to how the liability will be settled/ the purpose of the mechanism and I am going off deductive reasoning.

Second Question

The double entry for a reverse charge invoice, I just don't get. We have Sap and it has been set up to handle the transaction based on PO and Goods Receipting, but I want to understand it for myself.

This is as far as got, assuming an invoice for 100 Euro is received with no vat under the reverse charge mechanism.

  • Cr Purchases (100)
  • Dr Output vat 20
  • Dr Stock (100)

Don't get it. We pay out of the bank 100 in total and no vat was charged so the stock has to be 100, yet we need to account for the vat??????

Summary

If someone could be kind enough to help me with this I would be very grateful.

The purpose of the reverse charge I think I am almost there.

The double entry, not got a clue.

Please advise and thank you in advance.

DM

Replies (2)

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By tom123
21st Sep 2015 09:47

Nearly there

So, in your example above you should have said:

Dr - Input VAT (ie being the notional vat on your inputs)

You will hopefully find your system configured to also post

Cr - Output VAT 

for the same amount.

 

I am guessing, as you have SAP, your transaction volumes might be quite large - however hopefully you can pull a report on transactions in the VAT account(s) for the various codes and see this posting.

Thanks (0)
By johngroganjga
21st Sep 2015 09:55

The first point is that the entries on the return are not necessarily equal and opposite, although in many cases they will be. For example the trader's right to recover the input tax may be restricted due to partial exemption etc.

I am not sure what the problem with double entry is.

If you purchase goods for £100 you Dr purchases Cr Cash (or the supplier's purchase ledger account) with £100.

If you need to reverse charge VAT on the £100 you Dr input VAT and Cr output VAT with £20.

The only other entry you might need would be if some or all of the input tax was not recoverable, but that does not seem to apply in your case.  

Thanks (0)