Getting the VAT return right – part 2: International transactions
There can be a lot of confusion with completing VAT returns in respect of overseas transactions, i.e. buying and selling goods and services abroad. Neil Warren gives some practical tips in the second of his three-part series on VAT returns.
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Buying services from abroad
The “reverse charge” calculation often causes confusion, and applies when a UK business buys services from abroad. The basic principle is that the customer deals with the VAT rather than the supplier, avoiding the need for lots of overseas businesses having to register for UK VAT. As a starting point, always be clear that the reverse charge applies to services bought from both EU and non-EU suppliers, and not just from those based in the EU.
Janet is a computer consultant in Leeds and registered for VAT. She uses the services of a subcontractor based in India and paid him £10,000 in the VAT quarter ended 30 June 2017.
Under the reverse charge procedures, Janet must treat the services received from her Indian subcontractor as both her income and expenditure, and make the following entries on her VAT return:
Box 1 (output tax)
£10,000 x 20% = £2,000 i.e. the value of services multiplied by the rate of VAT that applies to that service in the UK, which is usually 20%.
Box 4 (input tax)
Enter the same figure as box 1 i.e. £2,000. This assumes that the expense in question relates to ‘taxable’ activities and there are no partial exemption/non-business issues. This is the case for Janet.
Box 5 (VAT payable)
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Nil effect if box 1 = box 4
Box 6 (outputs)/box 7 (inputs)
The net figure of £10,000 is included in both of these boxes i.e. Janet is treating the services received as part of both her income and her expenditure.
Why is an expense recorded in box 6?
I am often asked about the logic of a business paying money to an overseas supplier but then recording this payment as income, i.e. by making an entry into box 6 of its VAT return. However, if you think about a domestic purchase of goods or services between two VAT registered entities, the supplier will declare output tax in box 1 and the net value of the sale in box 6. The customer will claim input tax in box 4 and record the inputs figure in box 7, i.e. the same boxes are completed as with a ‘reverse charge’ calculation. It all makes perfect sense!
Selling services abroad
If Janet does some work for an overseas business customer, i.e. outside the scope of VAT under the general B2B rule, she will only record the sale in box
6 of her VAT return. I analysed the income sources that are included in box 6 in Getting the VAT return right - part 1.
Buying goods from abroad
The rules on buying goods from abroad are very different, depending on whether the supplier is based in an EU or in a non-EU country. In the latter case, import VAT is paid when the goods enter the UK (assuming they are standard rated). However, no VAT is charged by the supplier (or HMRC) in relation to a purchase from a supplier based in another EU country, which is not part of the UK.
Janet has purchased a new computer for her business from a company in the Republic of Ireland (an EU supplier) for £2,000. She will make the following entries on her next VAT return:
Box 2 (acquisition tax)
£2,000 x 20% = £400 i.e. value of goods multiplied by UK rate of VAT applicable to those goods. Note – no VAT would be due if the goods in question were zero-rated in the UK, such as hard copy books.
Box 4 (input tax)
Same figure as Box 2, assuming no input tax restrictions apply for exempt, non-business or private use.
Box 7 (inputs)
Net value of goods ie £2,000
Box 9 (acquisition of goods from other EU states)
Same figure as box 7 ie £2,000.
If Janet buys a computer from a non-EU supplier (eg from USA), she will be pay VAT when the goods enter the UK and claim input tax in box 4 of her return based on a C79 certificate as evidence for the claim. She will also record the net value of the purchase in box 7 of the same return.
Selling goods abroad
As explained in part 1 of this series, worldwide sales are included in box 6 of the VAT return, i.e. including all overseas supplies of goods and services. A separate entry is made in box 8 for goods that are sold to other EU countries but that box is blank for the sale of services.
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.