VAT can be daunting for any type of business. From ensuring you’ve registered before you reach the threshold, to recalculating your prices to include VAT.

But what happens to the VAT your business pays on purchases from a business that’s overseas? This is where the VAT reverse charge comes in.

First things first, if you’re not registered for VAT then the reverse charge doesn’t apply to you so you can breathe a sigh of relief!

If you are VAT registered though, and you buy things from businesses outside of the UK – we’re talking to you. But don’t worry, we’ll explain what the reverse charge means.

What is VAT?

VAT (which stands for Value Added Tax) is a type of tax that’s added onto most products and services sold by VAT-registered businesses. While you can voluntarily register if you like, it’s mandatory if your taxable turnover is more than £90,000 per tax year in a 12-month period.

There are some exceptions – for example, if you only supply goods and services which are exempt from VAT.

How does VAT work?

If you’re VAT registered, you’ll charge VAT on most of your sales depending on what rate applies to the goods and services you supply (the standard rate is 20%). You’ll need to keep a record of how much VAT you’ve charged, as well as the VAT your business has paid, for example if you’ve bought supplies from another VAT-registered business.

Once you’ve completed your VAT return, HMRC will be able to calculate whether you can reclaim VAT, or if you need to pay the difference. Reclaiming the difference means you’ve paid more VAT to other businesses than you’ve charged to clients and customers. Repayments are made by HMRC within 30 days of receiving your VAT return.

Paying the difference means the opposite, you have paid less in VAT on purchases than you’ve charged.

If you use bookkeeping software, you can store all your VAT invoices and records more easily, and send your returns directly to HMRC.

What is the VAT reverse charge?

In a nutshell, the reverse charge is the amount of VAT you would’ve paid for a service or supply, had you bought it in the UK.

Because the VAT is ‘reversed’ the responsibility of accounting for it is now on the customer, rather than the supplier. This also means the seller doesn’t need to register for VAT in the country where the ‘supply’ is made (the place of supply is the country that goods or services are supplied to).

How does the VAT reverse charge work?

Let’s say you hired a web developer who’s based in Spain to work on your website, and they charge you £200. The web developer won’t add VAT onto their invoice, but they will add a mandatory reference indicating that the reverse charge needs to be applied.

You’ll include this on your return at the VAT standard rate of 20% – just like you would if you hired a web developer in the UK. 20% of £200 is £40 – so the reverse charge amount that needs to be added to your VAT submission is £40.

How do I calculate the reverse charge if the invoice is in a different currency?

You can’t apply the UK VAT rate if the invoice is in a different currency, so you’ll need to convert the value into sterling first, and then work out the VAT reverse charge. Use the currency exchange rate in use on the date of the invoice.

How do I show the VAT reverse charge on my VAT return?

You’ll actually include the reverse charge on your VAT return in two places:

• Included in total amount of VAT you paid in that time period
• And again, in the total amount of VAT you charged in the same time period (as if you were the one who supplied the services)

This effectively cancels the VAT charge out all in one VAT return, rather than paying it on one return, only to reclaim it on the next. If you need any help or guidance, always ensure you speak to your accountant for more advice!

What if I sell to a business outside of the UK?

It’s a similar process – just the other way round. So, you wouldn’t charge VAT on the sale, but you would refer to the fact that the VAT reverse charge is included – leaving it up to the buyer to calculate the VAT and add a reverse charge onto their VAT return.

You need to ensure the invoice is clear, with the services provided, where you’re supplying them to and why you are not charging VAT on the sale.

Is the VAT reverse charge the same thing as the VAT domestic reverse charge?

No, although they work on the same principle. The VAT domestic reverse charge is for individuals in the construction industry scheme. Used like the reverse charge to combat VAT fraud, it leaves the responsibility up to the contractor to add VAT onto any supplies they buy, to then put on their VAT returns.

 
Need help with VAT? Learn about our online accounting services by talking to one of the team on 020 3355 4047 or get an instant quote.