VAT Partial Exemption and Reverse Charges
Trying to dechiper HMRC guidance about reverse charges...
Virtually all of our supplies are exempt and hence we reclaim a very small proportion of our input tax via the standard method of partial exemption.
Am I right in thinking that:
a.) the overseas input tax we account for via reverse charge should be excluded from the PE calculation
b.) but once the PE % has been calculated we can then claim back this proportion of the overseas VAT accounted for via reverse charge?
I.e. if I have an invoice for £1m (after conversion from euros) I account for input tax of 17.5% = £175,000. I then calculate my PE % excluding this amount to be say 5%. I can then reclaim 5% x £175,000 = £8,750 of the input tax accounted for.
Reverse Charge Recovery
The only rationale for the reverse charge is that it must be adjusted as part of partial exemption otherwise you'd have the situation where;
Every fully taxable person enters and claims the reverse charge and (by Pennys reckoning) every exempt trader enters and claims in full
No one would ever have less than full recovery of a reverse charge supply and the process is meaningless. It would also mean that every UK based Insurance Company, Financial Institution, and Funeral Director would source every scrap of their purchases from other EU traders so that they could charge themselves VAT, recover that VAT and get everything VAT free, unless they buy it in their own country in which case they get nothing back!
It would also mean that they could get a much larger recovery on UK overheads, i.e 99% exempt actual sales, they purchase a million pounds worth of stuff from abroad and suddenly their exempt sales are only 1% of their sales, giving almost full recovery of any residual input tax.
It would be madness.
Reg 101 (3) In calculating the proportion [ of Partial Exemption recovery] ...,there shall be excluded- (d) the value of any supply which...the taxable person makes to himself.
101 (2) says that attribution is based on the use of goods or services; reverse charging goods isn't a supply, it just creates the input tax value to be used, and that input tax is attributed just like any domestic charge.
Reg 104 also says "Where under any provision of the act a person makes a supply to himself, the input tax on that supply shall not be allowable as attributable to that supply"
The VAT Act itself says under Section 8 which defines the reverse charge, 'supplies which are treated as made by the recipient under [this section] are not to be taken into account as supplies made by him when determining any allowance to Input tax.
In answer to the original query, you enter the input tax to your books the same as any other input tax, so it's attributed the same as any domestic purchase and not dealt with as a seperate thing afterwards, its just that you cannot use the value of the 'sale' as part of your calculation of the recoverable proportion. Although to be fair it makes no actual difference whether you calculate them separately or not (i.e. you'll either get 5% back on it as part of your geenral overheads, or 5% by applying the genral overheads amount afterwards) unless you've got an input based special method.
Thank you, Spidersong
for doing the research (or already knowing it) and providing the correct answer
Without looking at the legislation
I would have thought 100% of the VAT is recoverable.
The reverse charge mechanism treats a UK taxable recipient as making a supply in the UK, hence having to account for output VAT on the supply - with a corresponding claim for input VAT. Since the input VAT relates directly to a taxable supply (albeit a deemed supply) I would claim the whole lot. Unless someone else has time to do the research and convince me otherwise?