Reverse Charge Reporting for VAT

Article ID: 2025165        Last updated: 10 October 2014

 

VAT on Services Received from Overseas Suppliers

(https://www.gov.uk/vat-imports-acquisitions-and-purchases-from-abroad#3)

When you buy services from suppliers in other countries, you may have to account for the VAT yourself - depending on the circumstances. This is called the 'reverse charge', and is also known as 'tax shift'. Where it applies, you act as if you are both the supplier and the customer - you charge yourself the VAT and then, assuming that the service relates to VAT taxable supplies that you make, you also claim it back. So there's no net cost to you - the two taxes cancel each other out.

When does the reverse charge on services apply?

The reverse charge on services only applies when the supplier is in a different country from you. It applies in two situations:

  • Where you are in business, belong in the UK and receive - from a supplier who belongs in another country - one of the services that are covered by the general rule for place of supply of services. For more about belonging and the general rule, see the link below.
  • Where certain other services are provided in the UK by a supplier who belongs in another country - including some services related to land and property. For a full list of these services, see Section 18 of Notice 741A at the link below.

The time at which VAT must be accounted for under the reverse charge will change on 1 January 2010, along with other changes to the VAT rules for international transactions. It's important that you consider now whether you will be affected by these changes and whether you may need to make changes to any of your software, systems or procedures.

Click here to find out about the basic rule for place of supply of services and the place of belonging.

How do you deal with the reverse charge on services?

You calculate the amount of VAT - Output Tax - on the full value of the services supplied to you, and then fill in the relevant boxes on your VAT Return as follows:

  • put the amount of VAT you calculated in Box 1, and if you're entitled to reclaim the VAT on your purchase of these supplies, also put the same figure in Box 4 (this in effect cancels out the figure in Box 1)
  • put the full value of the supply in both Box 6 and Box 7

Value of services from other countries

The amount of VAT payable of any service from another country is the same as the amount of VAT that would be paid if the service were supplied to you by a UK supplier for the same net amount. You must account for the value of the services in sterling, so you must convert their value into sterling if the services were priced in any other currency.

Click here for Notice 741A : Find out more about the reverse charge and services supplied from abroad.

 

Summary of steps to follow in AccountEdge

  1. Create a new zero rated VAT code – this code should be used when recording purchases of services that need to be reported using the reverse charge method. By using a separate code, all the transactions and the total value can be seen summarised within the VAT Detail report.
  2. At the end of your VAT period, run the VAT Detail report to get a total value of the services purchased that need to be reported under the reverse charge method.
  3. Record a journal to correct the Purchase/Input VAT reporting.
  4. Record a journal to correct the Sales/Output VAT reporting.
  5. Run the VAT Detail report and verify entries.

 

Step by Step

Step 1:  Create a new zero rated VAT code

At the top of your screen, go to Lists> VAT Codes and click the New button to create a new zero rated VAT code. Example below:

2025165B

This VAT code should be used when recording purchases of services that need to be reported using the reverse charge method. By using a separate code, all the transactions and the total value can be seen summarised within the VAT Detail report.

Step 2:  VAT Period End

At the end of your VAT period, run the VAT Detail report to get a total value of the services purchased that need to be reported under the reverse charge method.

2025165C

The example above shows 2 transactions recorded under the new ‘REV’ VAT code and the total sum of the transactions for the VAT period is £2000.

Step 3:  Record a journal to correct the Purchase/Input VAT reporting

Go to the Accounts menu and select Record Journal Entry. You'll be recording a jounal similar to below:

2025165D

The example above describes:

  • The first line entry is used to reverse out the purchases entered using the REV code
  • The second line entry is used to input the value using the Standard VAT code to correct the reporting. Note that the Display in VAT reports option is selected to Purchase (Input).
  • The last line is used to correct the journal due to the VAT difference so that the total Debits match the total Credits, all lines are against your VAT Due account so this journal should not affect your Balance Sheet, only your VAT reporting.

Step 4:  Record a journal to correct the Sales/Output VAT reporting

Go to the Accounts menu and select Record Journal Entry. You'll be recording a journal similar to below:

2025165E

The example above describes:

  • The first line entry is used to input the value using the Standard VAT code to correct the reporting. Note that the Display in VAT reports option is selected to Sale (Output).
  • The second line is used to correct the journal due to the VAT difference so that the total Debits match the total Credits, all lines are against your VAT Due account so this journal should not affect your Balance Sheet, only your VAT reporting.

Step 5:  Run the VAT Detail and VAT Return reports to verify entries

The VAT Detail report shows that the first journal has reversed out the values against the REV code so the total of this code is zero. The 2 journals have also reported the Output and Input Values and VAT as required.  Example below:

2025165F

 

The VAT Return report shows the VAT being reported in boxes 1 & 4, and the value of the supplies being reported in boxes 6 & 7 as required. Example below:

2025165G

 

The Find Transactions window shows that the 2 recorded journals have in total the same debit and credit values posted against the VAT Due account which means that your financial reporting remains unaffected.  Example below:

2025165H

 

 

Disclaimer: This information is of a generic nature. For specific advice regarding your particular circumstances please seek assistance from your Accountant, HM Revenue & Customs or your IT Consultant as appropriate.


Query words: VAT, reverse, charge, services, service, charges, EU