hong kong harbour

Calculating Reverse Charges

Top five common questions answered

Robert Warne, VAT, Head of VAT
hong kong harbour

UK based VAT registered entities must account for VAT on most services received from abroad using the mechanism known as the Reverse Charge as the ‘general rule’ for cross border service supplies. As HMRC becomes more sophisticated it is challenging VAT registered entities with regards to Reverse Charging.

How does it operate?

  1. HMRC define overseas as any supplier who is based outside the UK. So the Reverse Charge applies to supplies for both EC and Non -EC suppliers.
  2. HMRC are looking at services received from these overseas suppliers which, received from a UK supplier, would have UK VAT charged at the standard rate.
  3. HMRC are checking to see if you have applied a Reverse Charge to these services on your VAT return.

Examples of these services include:

  • Web hosting
  • Software licences
  • Consultancy
  • Photocopier/Asset hire
  • Marketing services
  • Fundraising
  • Google
  • Facebook

Examples of services that are not included:

  • Hire of transport
  • Land related services
  • Hotels

Am I doing it correctly?

Broadly speaking, you are required to convert these invoices into sterling.

  • You must then charge yourself VAT at the standard rate on these invoices and account for the VAT in Box 1 and 3 of your VAT return.
  • You are also required to recover the VAT charged to yourself on these invoices in Box 4 of the VAT return.
  • If the VAT incurred relates to a taxable supply, there is a full entitlement to recover the VAT in Box 4.
  • If the VAT relates solely to an exempt or non-business activity, there is no entitlement to VAT recovery in Box 4.
  • If the VAT relates to a mixture of activities (as is often the case), there will be a partial recovery of VAT in Box 4.

Why does it matter?

A lot of the services purchased abroad do not give the charity the right to a full recovery of input tax.

As a result, HMRC are visiting or writing to the charity with lists of services to check whether the Reverse Charge has not been completed.

Where the Reverse Charge has not been applied, this has led to assessments which could, in turn, lead to penalties for not completing VAT returns with ’reasonable care’.

Why is it difficult to pick up?

Supplies from overseas are often purchased via the charity’s credit card and will be entered onto the accounting system undetected.

The future

As Making Tax Digital becomes further reaching in the next few years, it will be even easier for HMRC to see whether or not these charges have been completed.

Our top five most common questions

1. Does the Reverse Charge only apply to purchases from suppliers based outside the EC? 

No: the Reverse Charge applies on supplies to a UK recipient from anywhere outside the UK. 
2. We are not registered for VAT – do we have to account for the charge?  ic_keyboard_arrow_right_black_24px Maybe: The amount paid will count as turnover for the purposes of determining if the entity is required to be registered, so if the payment together with other taxable income exceed the current limit of £85,000 on a rolling 12 month basis, the charge must be applied.
3. Is the Reverse Charge applicable to supplies of hotels, subsistence and flights?  ic_keyboard_arrow_right_black_24px

No: these supplies are all exceptions to the ‘general rule’ and local VAT will be applied to the supplies.

4. Will the Reverse Charge apply after Brexit?
We would expect so the mechanism is in place to protect the UK service industry and, therefore, we would not expect this to change post Brexit.
5. We have not accounted for the Reverse Charge on services to which it does apply - what do we do?  ic_keyboard_arrow_right_black_24px If the omission results in a payment to HMRC: the VAT charged cannot be fully recovered, an error correction will need to be made to HMRC - if the entity is registered, the correction could go back four years. However, if you are not registered and should have been, the error is not subject to the four year limit.

For further information please contact Robert Warne.

Contact us

Robert Warne
Rob Warne
Partner, Head of VAT and Customs Duty services