What is a reverse charge?
Reverse charge is when you declare and submit the VAT due on a purchase from outside the UK while also claiming the VAT back, effectively cancelling out the payment due.
Certain purchases (usually of services) can be eligible for the reverse charge rule.
The VAT reverse charge moves the responsibility of recording a VAT transaction from the seller to the buyer for goods and services bought in other EU countries.
VAT reverse charge example
So for example, if you hire a Spanish web developer to code some new pages for a flat fee of £500, you’d have to apply VAT as if the developer was UK based. In this instance, you’d charge the standard rate of 20% (so £100).
You’ll have to add this figure to both the total of VAT you’re going to pay this quarter, and also to the total you’re going to reclaim this quarter. This means you’re not paying or reclaiming any extra from HM Revenue & Customs.
VAT reverse charge EU suppliers
You need to account for VAT at the same rate that you would from a UK supplier. This VAT is called “acquisition tax”. You’ll probably be able to reclaim this if it relates to VAT taxable supplies that you make.
You can find out about all the UK VAT rates, including the flat rate, in our Ultimate Guide to VAT.
Why apply reverse charge VAT?
Reverse charge VAT is applied to reduce, or even eliminate, the need for sellers to VAT register in the country they are supplying goods and services to. This makes it easier, and more attractive, for business to trade within the UK because it cuts paperwork and obligations for them.
If suppliers do have to pay local (UK) VAT on costs related to the goods and services they supply under the reverse charge, then these can be recovered through an EU VAT claim.
Can I reverse charge if I’m not VAT registered?
If you’re not VAT registered but receive an invoice from an EU company that includes a reverse charge on the invoice, then you have to include the value of the services in your net sales. This’ll count towards whether you hit the VAT registration threshold or not.
If you breach the VAT threshold, you’ll have to register for VAT. This can cause issues, for example you may incur input VAT which cannot be recovered as you have no taxable supplies for output VAT.
Your supplier will charge VAT at the local rate in their country. You can find a list of EU VAT rates here.
VAT reverse charge sales list
If you have reverse charges, you’re legally obliged to submit a reverse charge return (also known as a reverse charge sales list or RCSL) to HM Revenue & Customs. You’ll have to record items where reverse charges have been applied separately to your normal VAT records. This is to help identify the reverse charges on your VAT return.
Making a Reverse Charge in KashFlow
In order to claim purchases under a reverse charge in KashFlow, you need to do the following:
- Indicate the supplier is VAT registered in another EC state. Navigate to the supplier, and then click ‘Other Info and Settings’ the tick the check box labelled “This supplier is VAT registered in another EC Member State”.
- Find the purchase code to treat as a service. Navigate to Purchases > Purchases Codes – and then choose the correct code.
- Once in the purchase code, Un-tick the option“Treat purchases of this code form suppliers in other EC states as a product on my VAT return”. This will treat the product code as a service.
The transaction will now appear in the VAT Report for Box 1, Box 4, Box 6 and Box 7.
- If the “Treat as a product” option is not showing, you can activate it. Navigate in KashFlow to Settings > Advanced Settings – and then tick the option “Let me set, on a per-nominal basis, which codes should be treated as EC sales”.
- A fixed asset cannot be categorised as a service. If you are also dealing with purchases from EC suppliers you will not be able to un-tick the option to “Treat purchases of this code form suppliers in other EC states as a product on my VAT return”.
- You should only apply this if your supplier is VAT registered.