In the world of Value Added Tax (VAT), certain concepts can appear particularly convoluted, with the VAT reverse charges mechanism topping the list.
Why, you ask?
Well, its application rests on an array of scenarios, each affecting the dynamics of how VAT is charged and paid.
If you’re in a muddle about how this works, don’t worry – we’re here to help you unravel the mystery.
For starters, the reverse charge mechanism flips the usual system on its head.
Rather than the supplier settling the balance of VAT with HMRC, in the UK, the buyer, or ‘end user’, is the one who foots the bill.
This system is applicable only when the buyer is not making an onward supply.
In business-to-business relationships, the customer’s location determines the place of supply. So, if a UK VAT-registered supplier sells services to a non-UK client, VAT is not charged because the transaction is outside the scope of VAT. However, if the customer’s business is VAT registered in a VAT-operational country, they can either display the reverse charge on their VAT return or consider the purchase as part of the VAT registration threshold in their country.
Brexit changed the rules for businesses based in Great Britain. They can no longer apply the VAT reverse charges to EU sales. However, Northern Ireland businesses can continue to use the reverse charge method as they remain within the area of EU VAT.
What happens when a UK VAT-registered business purchases a service from overseas?
Here’s where the reverse charge sprinkles yet another layer of complexity. The net VAT figure is used for both sale and purchase, treating the transaction as a sale to itself.
Furthermore, the introduction of the domestic reverse charge (DRC) rule creates another facet of the reverse charge mechanism.
DRC applies where a UK VAT-registered business provides or receives standard or reduced VAT rate services reported under the Construction Industry Scheme (CIS).
Understanding the VAT reverse charge mechanism is crucial for every business.
If applicable, you, as a supplier or subcontractor, invoice your customer without VAT. However, you provide a note indicating the amount or at least the rate of VAT to be declared by the customer.
Remember, VAT regulations can seem like a tangled web, but with the right knowledge and understanding, you can navigate it with confidence.
If you need help managing the VAT reverse charges system for your business get in touch with our friendly team.
