Hi. I have a client, UK based customer, providing IT software development services to a UK based customer (charges VAT on the supply). They sub-contract some of the IT development work to a business based in India. My question is how do they account for the VAT on the services they have bought?
My thoughts are that this is "reverse charge" therefore the amount charged goes into Boxes 6 & 7 with the notional VAT in boxes 1 & 4 (based on my reading of VAT notice 700/12, section 4.6).
My software (Sage One) suggests boxes 6 & 7 only.
I appreciate that this has no effect on the amount of VAT my client pays but, in my opinion, does have an impact on the chances of the client getting a VAT inspection (as these purchases form quite a high proportion of the overall figures).
Any VAT experts (or Sage One programmers) want to comment?
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Replies (6)
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You are right in that reverse charge services from overseas go into Boxes 6 & 7 and also Boxes 1 & 4 as per HMRC guidance para 4.6 as you have stated.
Not got Sage One to hand (we mainly use QB and Xero) so cannot answer your question other than to confirm that only populating Boxes 6 & 7 is wrong.
My software (Sage One) suggests boxes 6 & 7 only.
If you are correctly coding the tranactions isage cloud (aka sage one) will do the correct vat return entries
Note within the software you need to code transactions as being
eec reverse charge (ie not drc construction)
you need to flag as services not goods
you neeed to ensure you need to flag the transaction as 20% standard rated
I am presuming your error here is that you have not flagged up the purchae invoice as being 20% standard rated. Its somewhat quirky that you need to enter it as 20% standard rated (as there is no vat on supplier invoice) but that will hopeuflly do the job of including boxes 1 and 4. For sage to know that outputs and inputs are being at 20% it needs you to confirm that fact as in theory vat rate could be reduced rate.
Ps well done for getting as far as coding ethe item as reverse charge - many peeps dont even get that far ?
Thanks rmillaree. I'll ask Sage how I should correct this (and set up the supplier for future transactions). I'm new to the software and still finding it trickier than Sage Line 50 to be honest.
The easiest fix if transactions have been posted and paid down may is to journal debit input vat and credit output vat that pulls through to vat return for appropriate period totals.
If the invoice is unpaid and vat return not drafted (you can delete if drafted) you should be able to edit vat rate.
If payment has been allocated you would need to go in to payment allocations and unmatch the payment then edit invoice then reallocate transactions. I dont trust sage to correct unallocated payments on accout that are vat mismatches though when redone - eg sage asks for vat arte for payments on acount and does not offer revesre charge. If you go down this route always sure sage has corercted itself - its not 100% robust unfortunately in that regard ! - so journals pulled onto vat return probably better.
xero destroys sage here for ease of use with find and recode (any vat you like in bulk) and also has ability to simply post cashbook payment as reverse charge without hassle of raising full i am supplier invoice which is completely unecessary other than sage makes you do it. Sage has had plenty of time to sort this unecessary complication but has not done so as of yet.
Yes, Xero is better for this aspect. I'm not overly keen on the lack of telephone support that Xero give though.
