What is a Reverse VAT Charge?

While typically, the supplier of goods and services must account for VAT on their invoice and returns, in certain industries, this has recently changed, making the recipient accountable for VAT.

This change was introduced as a tool for counteracting tax fraud in industries that import supplies from outside the country.

Here we’ll discuss the meaning of the reverse VAT charge and how it works. It also explains when and how it’s used and what the responsibilities of the supplier and the recipient are. Let’s get started!

What is VAT?

VAT (or Value Added Tax) is a consumption tax added to products or services in order to increase their production and distribution value. It plays a fundamental role in providing revenue for the UK government and because of this, any attempt of misuse or fraud is addressed appropriately.

What is a Reverse VAT Charge?

According to one of the fundamental rules of VAT accounting, when selling products or services to another VAT-registered business, suppliers typically include the VAT on their invoice and account for it on their VAT return. However, some specialised industries (such as construction and tech) have recently become an exception to this rule. In these, it’s the customer, not the seller, who must account for VAT.

As mentioned before, these rules typically apply to companies importing products and services from outside the UK. Reverse charge VAT on imported goods and services essentially represents the amount of VAT a customer would’ve paid for the goods had they bought them in the UK.

When the rules for reverse charge VAT apply, the business you are buying from has the duty not to include VAT on their invoice, and you have the obligation to account for them on your returns.

As a customer, it’s you who are adding VAT on imported goods to the total VAT due to HMRC in each quarter. This means you are benefiting from the transaction at the time of the import as you won’t have to pay any VAT at customs, wait for your product until your payment goes through, or reclaim anything from the HMRC later.

The reverse charge is commonly used to prevent situations where the supplier charges the VAT to their customer, receives it, but goes missing instead of declaring it to HMRC. Since the reverse charges become the responsibility of the customer, the supplier can’t get away with this kind of fraudulent behaviour.

When Can a Reverse VAT Charge be Used?

It’s important to note that reverse charges don’t apply to every industry. Here are a few examples of the situations reverse charge VAT can be used:

·   If you are buying services and products from outside the UK, apply the Postponed Accounting System

·   If you are buying goods like marketing or advertising services from businesses based in Ireland.

·   If you are buying services from an overseas company with reverse charge VAT

·   If you are using the Domestic Reverse Charge VAT system. This means buying or selling technical products, such as computer chips, mobile phones, or related specified services, including translation, programming, and similar

·   If you are selling or buying products and services for the construction industry. Under this scheme, contractors buying goods from their subcontractors are accountable for the VAT

When Doesn’t Reverse VAT Charging Apply?

There are also several industries when Reverse VAT charging may not be applied. But most importantly, if your business isn’t registered for VAT accounting, you won’t be able to take advantage of the reverse charges either.

It also does not affect companies providing goods or services directly to the consumer. Nor does it affect these customers themselves as they are considered the end user – who only gains a specific product or service and nothing more.

How Does Reverse VAT Charge Work?

Applying the reverse VAT law charge in practice works differently for suppliers and the recipients. Here is what both parties need to know.

Suppliers

If reverse VAT charges apply, suppliers issue an invoice without VAT and they need to specify this on the invoice. However before you even get to that, you must ensure the customer is registered for VAT and ask them to provide their buyer’s VAT number, as you’ll need to include this on the invoice.

The invoice should also state the rate of the VAT that applies for the specific purchase or how much VAT is due if you’ve calculated it.

You will also need to validate that the buyer is not an end user. If you use an automated program to account for VAT and generate client invoices, you will probably need to modify the tax codes you use in that program.

Customers

If you are a customer who receives products or services that meet the criteria for the reverse VAT charge, you’ll receive an invoice from your supplier without the VAT. To be exempt from being charged VAT by your supplier, you must be VAT registered and prove that you’re not the end user.

However, you’ll need to charge yourself the VAT. This means manually calculating the VAT that’s due when you are preparing your VAT return. You will need to report the amount both as a deductible and as due on your VAT return.

If you are also using automated programs for recording the invoice you receive and preparing for your VAT return, you will also need to change your tax codes. You will need to use codes that allow you to present the receipt for reverse charge services, which will calculate the VAT for you.

Final Thoughts

In certain industries, the reverse charge is how recipients must account for VAT on services they get from businesses based outside the UK, including Ireland.

Some of the most affected sectors are the construction industry and the technology retail, but recipients of other services may also be subjected to reverse VAT charges. While this may complicate things for foreign companies, the recipients should be even more careful about the products and services they receive.

In addition, reverse VAT doesn’t apply to all received items. If you are planning to obtain products or services outside the country, make sure to do your due diligence in time and find out whether you’ll be accounted for this charge.