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.
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.
Example 1
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)
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