All About Reverse Charge VAT
Value-added tax (VAT) has been collected since 1973. It is a major source of income for the UK government. This consumption tax is added to products and services during each stage of their production or distribution.
Reverse Charge VAT Defined
Reverse charge VAT is when a customer is allowed to charge themselves VAT. They can pay the tax directly to HM Revenue and Customs (HMRC). This means the supplier doesn’t have to invoice the customer for VAT later on. As a result, the supplier avoids being in the position of missing an HMRC payment, known as missing trader fraud.
The customer, as opposed to the supplier, must account for the VAT when filing their VAT return. In most instances, when selling goods or services to another VAT-registered company, you list the VAT on your invoice. Then you need to account for it on your VAT return.
With reverse charge VAT, no tax is charged on the sales invoice. You do, however, have to note on the invoice the amount of VAT value and that you are using the reverse charge VAT rules in this instance. The business buying the goods or services must declare both the output and input VAT.
When a Business Can Use Reverse Charge VAT
Reverse charge VAT can be used by companies when it:
- Buys services from a company based outside the UK.
- Buys products from outside the UK. This practice is called postponed accounting.
- Buys and sells specific goods and services, such as mobile phones and computer chips. This is called Domestic Reverse Charge VAT.
- Buys and sells services reported under the Construction Industry Scheme (CIS). Under this scheme, the contractor buying from a subcontractor must account for the VAT charged.
How Reverse Charge VAT is Applied to a VAT Return
You may be wondering how to fill out the VAT return when there is reverse charge VAT to account for on the document.
The VAT is recorded as a sale and a purchase on the VAT return. They cancel each other out, leaving a net zero.
Taxpayers who have selected the Standard or the Lower Rate, record their VAT as follows on the return:
Box 1: VAT due in this period on sales and other outputs
Box 4: VAT reclaimed in this period on purchases and other inputs excluding any VAT
The net amount is recorded in
Box 6: Total value of sales excluding VAT
Box 7: Total value of purchases and other inputs
Types of Businesses That Can Use Reverse Charge VAT
The VAT reverse charge can be used by businesses that provide services to other businesses. These businesses, in turn, sell a product to a consumer. It doesn’t apply to businesses that provide a service directly to consumers.
Examples of Services Affected by Reverse Charge VAT
This particular tax scheme impacts businesses providing services outlined under the CIS.
Only individuals and businesses registered for VAT in the UK qualify.
It doesn’t apply to zero-rated services for VAT.
Third-party recruitment agencies that temporary workers to clients/employers are not affected.
HMRC states that reverse charge VAT impacts these services
- Decorating or painting the inside or the exterior surfaces of any building or structure
- Site clearance, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works, earth-moving
- Constructing, repairing, altering, demolishing, extending or dismantling buildings or structures, including offshore installation services
- Reservoirs, pipelines, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- Altering, repairing, extending, demolishing, constructing of any works forming, or planned to form, part of the land, including walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours
Services Not Impacted by Reverse VAT Charge
The following services are on the list of ones not impacted by the reverse VAT charge, according to HMRC:
- Drilling for, or extracting, oil or natural gas
- Installing seating, blinds and shutters
- Installing security systems, including burglar alarms, closed circuit television and public address systems
- Making, installing and repairing artworks such as murals, sculptures and other artistic items
- Signwriting and erecting, installing and repairing advertisements and signboards
- architectural or surveying work, or of building, engineering, interior or exterior decoration and landscape consultants
- Manufacturing components for lighting, air conditioning, ventilation, heating, power supply, drainage, sanitation, water supply or fire protection systems, or delivery any of these to site
- Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
- Extracting minerals and tunnelling, boring or construction of underground works for this purpose
Mooncard Makes Tracking VAT Easy and Convenient
Mooncard gives you a complete payment solution for your company. This corporate payment card makes tracking all your business expenses, including VAT, an easy and convenient process.
When an employee needs to charge a business expense, they use the Mooncard corporate card. The software allows them to record a photo of their receipt, which is stored automatically. The image is automatically sent to your Accounts Department for processing. Nothing could be easier since your Accounts Department doesn’t have to re-input the entry. Your company saves time and money!
Contact us now to learn more and book your online demo today!
Check out our others articles on VAT :