The reverse charge.
The reverse charge process is used in many situations for VAT and it is important that these are clearly understood.
Overseas services.
The classic situation is in the case of the receipt of services into the UK from an overseas supplier. Where an overseas supplier supplies services to a UK based business then they will typically not charge VAT as the supply will be subject to the reverse charge.
This means that the recipient business will treat the supply by that overseas supplier as if it were a supply made by the recipient. This will mean that they must make entries in box 1 and box 6 and also in box 4 and 7 of the VAT return.
Usually, the net effect is nil but this may not be the case if the recipient is subject to less than 100% reclaim of input VAT e.g. due to some exempt supplies or some non-business use.
An area that is often forgotten (and one that is important for a non-VAT registered business) is that such supplies are treated as “taxable supplies” for registration purposes and therefore they must be included in any review of the £90,000 threshold.
Imported small consignment goods.
In general, the VAT treatment for the import of small consignments of goods is that sales VAT is due by the seller. However, if the buyer is VAT registered (and provides the seller with their VAT number) then the reverse charge can be used and therefore the buyer will account for the sales VAT instead.
Construction industry scheme reverse charge.
Where a sub-contractor supplies taxable supplies that fall inside the construction industry scheme to a main contractor (acting as a contractor) and both are VAT registered, then the sub-contractor will not charge VAT. They will use the reverse charge instead. The reverse charge will typically apply to the whole invoice and not just the labour.
Other reverse charge supplies!
The above scenarios are the main situations where the reverse charge applies. However, it can also apply in some other specific cases e.g. the reverse charge applies to the sale of mobile phones or computer chips exceeding £5,000 net of VAT and also to certain supplies of gas and electricity, emission allowances, telecommunications and renewable energy certificates.
Declaimer: The above is intended to be only a brief and broad overview of the topic as at the date of writing and is for general information purposes only. It is in no way intended to be taken as advice or acted upon. We strongly recommend that you obtain appropriate independent professional advice before you take any actions or make any decisions in this area.
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