VAT - are you reversing the charges?

Are you trading with businesses outside the UK? If so, you may need to operate the "VAT reverse charge procedure". And you need to get it right! Unfortunately, many businesses are falling foul of the requirements.

Do not assume this can be taken care of at the year end. This is not possible because the VAT is a tax on transactions and the reverse charge, where applicable, will apply to individual transactions and, therefore, individual invoices.

So, what does it mean? What’s the problem? And what do you need to do?

 

What is it?

The principle behind VAT is simple: suppliers of VAT-able goods and services add VAT to their selling prices. For VAT registered businesses, this amount can be reclaimed (thus rendering the process somewhat circular) leaving the ultimate consumer to pick up the tab. (This is of course a vast over-simplification, but you get the gist.)

So, what’s the problem?

Under EC law, if the supply is deemed to take place in the territory where the customer belongs, then it may be the customer, rather than the supplier, who has to declare and pay the VAT. If the customer is VAT registered and using the supply in his or her business for a taxable purpose, then this VAT can be reclaimed in the normal way but this "circularity" does not eliminate the requirement to account.

If the reverse charge applies, then as a customer, you need to be declaring and paying the VAT on your Returns. If you are the supplier, you must remember not to charge VAT on your invoices and comply with statistical declaration requirements.

What do you need to do?

You need to understand the rules and when they apply.

The basic rule has always been that VAT is chargeable in the territory where the supplier belongs. Confusingly, however, the basic rule has exceptions. For example, the supply of property services has always been deemed to have taken place in the territory of the property rather than of the supplier.

This has become even more of an issue recently because, since 1 January 2010, very many more types of service will be deemed to be supplied where the customer belongs. Indeed this is to become the default position for business to business transactions.

Will this affect you?

This will be particularly relevant if you export goods and services (where you may not only be relieved of the obligation to charge UK VAT but may have to register in another territory), or acquire goods or services from another country where you may have to apply the reverse charge procedure outlined above.

If, as Benjamin Franklin so famously put it, nothing can be said to be certain, except death and taxes, he may have added "and nothing can be said to be so complicated as VAT!" VAT is extremely complex and professional advice should always be sought.

Andy White
Partner
Carter Backer Winter LLP
Part of the MGI association
www.mgi-uk.com

 

Comments

VAT reverse charges

Anonymous | | Permalink

Yes, we know what it is but how do we actually apply it?

Simples

DAS | | Permalink

DR Input tax account , Cr Output tax account.

Malcolm McFarlin's picture

Reverse charge and flat rate scheme

Malcolm McFarlin | | Permalink

Rather uniquely -transactions that are outside the scope of VAT such as reverse charge does not constitute turnover for flat rate scheme ['FRS'] uses. They should therefore be excluded from the sum to which the FRS percentage is applied.

There is a specific clause in the FRS legislation that provides that services received from outside the UK does not apply. These two points are covered in section 6.4 of VAT Notice 733.

Because the figure required in box 6 of an FRS trader's VAT return is the gross turnover to which the FRS percentage has to be applied, it follows that they should not report in box 6 of the VAT return sales of qualfying services to overseas businesses.

More confusion for everyone no doubt!

Malcolm McFarlin

www.mandrtaxadvisers.com

 

Reverse charge under FRS

propraxis | | Permalink

Hi,

Interested in your views on the following:-

1. UK company registered under the FRS purchases Google Adwords from Google in Ireland.

2. Google raises invoice stating 'reverse charge'

It would appear from Notice 733 section 6.4 the UK company registered under the FRS does not have to include Google Adword invoice on VAT return as this section states:-

"purchases services from outside the UK to which the reverse charge applies
you do not make any adjustment to your flat rate turnover for these supplies.
For more information about reverse charges, see Notice 700 The VAT Guide."

Qu1 - Does this mean that the UK company does NOT have to pay the standard rate VAT on the Google Adword invoice?

The reason I ask is because if Google was a supplier in the UK they would have raised the Invoice including VAT and therefore the UK company would have paid VAT and could not claim back as they are registered under the FRS.

The reason I also find this very confusing is because:-

HMRC webpage: http://www.hmrc.gov.uk/vat/managing/returns-accounts/fat-rate-returns.htm

Flat Rate Sceme: How to complete your VAT Return box-by-box states:-

You need to include any services from abroad that the reverse charge applies to, but don't include the value of the services in your flate rate turnover calculations.

Does Would appreciate your views.

Regards

SteveB

Malcolm McFarlin's picture

FRS VAT on supply of services from abroad

Malcolm McFarlin | | Permalink

SteveB

In answer to your question -there are two schools of thoughts in this respect. One that persons on the FRS should record the VAT reclaimable in Box 4 and the other that it is outside the scope and not recordable. HMRC own guidelines seems to give conflicting advice.  HMRC will say that there guidelines are only a guide and there was a recent case when they admitted that their guidelines were incorrect but it did not stop them raising assessments.

However if you turn to the actual legislation VAT regulations 1995/2518 reg 55u -it states 'Section 8 of the Act (reverse charge on supplies from abroad) shall not apply to any relevant supply or relevant purchase of a flat rate trader -this came into effect from 25 April 2002.

I would therefore subscribe to the law rather than HMRC public notices.  At the end of the day which ever option you choose there is no tax loss and HMRC will be hard pushed or desperate to impose penalties.  After all the government are supplosed to be in the business of making tax matters simpler for the small businessman.

Malcolm McFarlin

www.mandrtaxadvisers.com

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