How to calculate the reverse charge on VAT returns when buying services from abroad

The ‘reverse charge’ calculation often causes confusion.  It 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.

Remember 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  – Reverse Charge for Louise

Louise is a marketing consultant in Brighton and registered for VAT. She uses the services of a website design company based in India and received services of £10,000 in the VAT period ended 31 March 2018. What entries will she make on her VAT return for these services?

Under the ‘reverse charge’ procedures, Louise must treat the services received as both her income and expenditure. She will make the following entries on her VAT return:

Box 1 (output tax): £10,000 x 20% = £2,000 – the value of services multiplied by the rate of VAT that applies to that service in the UK, usually 20%.

Box 4 (input tax): same figure as Box 1 (£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 Louise.

Box 5 (VAT payable): nil effect if Box 1 is the same as Box 4.

Box 6 (outputs)/Box 7 (inputs): the net figure of £10,000 is included in both of these boxes so Louise is treating the services received as both her income and expenditure.

The logic of a business paying money to an overseas supplier but then recording this payment as income in Box 6 of its VAT return can be confusing at times.  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. So, we end up with the same boxes completed as with a ‘reverse charge’ calculation.

Selling services abroad

If Louise does some work for a French business customer (or Australian business customer as the rules for selling B2B (business to business) services are the same for EU and non-EU customers), which boxes of the VAT return will be completed?

The answer is ‘only Box 6’ (outputs). The service is outside the scope of VAT because the place of supply is outside the UK so no VAT is entered on the VAT return. The only exception to this rule is if your business uses the flat rate scheme.

Don’t forget you will need to complete an EC sales list each quarter.

 

IMPORTANT: Ignore Box 8 and Box 9 for services

Don’t forget that boxes 8 and 9 on the VAT return are only used if you either buy or sell ‘goods’ from a VAT-registered business in another EU country. The boxes do not relate to services. So if you only buy or sell services abroad, then the figures in boxes 8 and 9 will be zero.

 

Please note:

  • Xero Users: When you are buying services –from outside the UK when entering your bill into Xero  you will need to use the following VAT code “Reverse Charge expenses” (20%). If you are selling services to companies outside of the UK, you need to use VAT code “zero rated for EC Services” on your invoices.
  • Free Agent Users:- You may find this link helpful (information about selling services to the EU).

If you need help, please contact Shelley for further information.

 

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