Normally, the supplier is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed, and it is the customer who must account for any VAT due. Don’t get caught out!
Purchasing services from abroad
These will be obtained free of VAT from an overseas supplier. What is known as the ‘reverse charge’ (RC) procedure must be applied. Where the RC applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must account for output tax, calculated on the full value of the supply received, and (subject to partial exemption and non-business rules) include the VAT charged as input tax.
The effect of these provisions is that the reverse charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus, creating a level playing field between purchasing from the UK and overseas.
Accounting for VAT and recovery of input tax.
Where the RC procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must
- account for output tax, calculated on the full value of the supply received, in Box 1
- (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4
- include the full value of the supply in both Boxes 6 and 7
Value of supply
The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration. The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
More on consideration here.
Time of supply
The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.
Registration
If a business is not UK VAT registered, it must recognise the value of RCs in determining its turnover. That is; if its turnover is below the registration limit (currently £85,000 pa) but the value of its RCs supplies exceed this limit, it must register.
Other RCs
The RC or similar procedures can also apply in the following situations:
Import of goods (postponed accounting)
Mobile telephones
Motor cars
Land and buildings