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Reverse charge services from abroad (if on cash accounting)

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The following information is for general guidance only and should not be taken as definitive VAT advice, since individual circumstances may vary. To determine the VAT treatment for your particular transactions please refer to HMRC guidance or seek tax advice from an accountant.

Introduction

If you determine that the place of supply (as explained in Purchases of services from abroad) of a purchase of services from an overseas supplier, is the UK, it is normally subject to UK VAT under the reverse charge mechanism.

Guidance in the HMRC VAT Cash Accounting Scheme Manual indicates cash accounting does not apply to reverse charge VAT transactions.

Therefore these transactions should be accounted for under the standard accounting method, i.e. at the time of the invoice, rather than payment (if different).

To do this while maintaining cash accounting for your other transactions, leave the VAT cash accounting setting ticked (Set Up>VAT) and perform the workaround below for reverse charge purchases.

To enter the purchase:

Note: If you are not on cash accounting, refer to Reverse charge services from abroad instead.

1.Create a new Expense (or Cost of Sales if appropriate) account (Setup>Accounts>All>New) and name it something like 'Reverse charge services - abroad':

Reverse charge services - abroad
Do not tick Entries analysed to this account are normally within the scope of VAT. This is to prevent the transaction from being picked up in the VAT return under cash accounting. Instead, it is accounted for in the VAT return under standard accounting by the journal in step 3.

2.Enter the purchase using a PIN (or PAY for a non-credit purchase) transaction; in the header section, enter:

Total

Input VAT

Net

Net amt

Blank or 0.00

Net amt

In the Analysis of net amount section, enter:

Amount

Analysis Ledger

Analysis Account

Net amt

Expenses/Cost of Sales

The account you created in step 1

Leave Type of Purchase (for VAT purposes) as Normal.

For example, for a purchase of £100 of services subject to the reverse charge:

PIN_REV_CHARGE

3.Use the JRN transaction (or journal import function) to enter a journal to debit VAT - Input, and credit VAT - Output. Enter the same date as the purchase transaction in step 2.

You should also enter the net amount in the Net column for each entry - as a positive figure for the VAT - Input entry and a negative figure for the VAT - Output entry.
For example, reverse charge VAT due of £20.00 and input VAT reclaimable of £20.00 for a net purchase of £100.00, would be entered as follows:

JRN_REV_CHARGE

Screenshot of a journal entry to account for reverse charge VAT on services from abroad if on cash accounting        
You should make reference to 'reverse charge' in the Transaction details field, to identify output VAT due under the reverse charge in the Backup report of the VAT return. You should also make reference to the associated purchase transaction number, or the supplier's invoice number in the Entry details field.

Completing your VAT return

If you enter the journal as described in step 3. above, the VAT return will automatically be populated with the required values in the appropriate boxes as follows:

VAT return element

Included in VAT return

Amount included

Reverse charged output VAT

Box 1

VAT amt

Input VAT reclaimable

Box 4

VAT amt

Net value of deemed supply

Box 6

Net amt

Net value of purchase

Box 7

Net amt