Charities and the reverse charge

Pound coin - VAT reverse charge problem for charities
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Les Howard identifies a hidden - or not so hidden - cost for charities that buy in services from suppliers abroad.

A particular ‘anomaly’ in VAT legislation can result in a serious VAT cost arising when a charity purchases services from a provider based outside the UK.

I came across this recently where a UK-based charity outsourced its bookkeeping and accounting function to a third party provider outside the EU.

The issue arises because of the way the Reverse Charge operates. This is a mechanism that impacts many cross-border supplies of services. The General Rule for B2B services is that the Place of Supply of those services is where the recipient belongs.

For example, I appoint a France-based solicitor to advise me. The place of supply is in the UK. The solicitor does not need to account for French VAT. The Reverse Charge means I account for the output tax at the rate applicable in the UK, ie: 20%. Assuming the supply is for the purpose of my business, I can recover that VAT as input tax in the normal way.

The same principle applies when the supplier is located outside the EU. The Place of Supply is still where the recipient belongs.

The problem for a charity which has both business and non-business activities is that the output tax accounted for under the Reverse Charge mechanism can only be recovered subject to its ‘Business:Non-Business’ calculation.

Worked example: a charity spends £50,000 on its out-sourced IT support and social media. Output tax of £50,000 x 20% = £10,000 is due. Suppose its recovery rate is 15%. This means it recovers £10,000 x 15% = £1,5000, leaving £8,500 irrecoverable.

 

About Les Howard

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Hi, I am a VAT Consultant, working mainly with charities. I am based in Cambridgeshire

I have over 20 years experience in VAT, and am currently also a part-time member of the Tax Tribunals.

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23rd Feb 2017 16:46

I'm no VAT expert, so I may be missing something, but I don't see in what way this is an anomaly. Wouldn't the same irrecoverable VAT outcome arise if the charity buys the same service from a UK supplier?

So, is this article merely saying that charities that buy overseas services should be aware of the reverse charge, so this is not a way for a charity to avoid irrecoverable VAT?

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to garethgreen
24th Feb 2017 17:28

You are correct. But, if a Charity thinks it can minimise its irrecoverable VAT by purchasing supplies from outside the UK, then it is an unwelcome surprise. (Many Charities do not appreciate the impact of the Reverse Charge.)
A VAT-free invoice triggers a VAT charge: and that is the 'anomaly.'

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