How Does VAT Reverse Charge Work?

Posted by on Feb 14, 2021 in Brexit Planning, Guides | No Comments

Under VAT reverse charge, if you are customer, you need to credit your VAT account with an amount of output tax, calculated on the full value of the supply that you have received, and at the same time debit your VAT account with the input tax to which you are entitled, in accordance with the normal rules.

You then include in the relevant boxes of your VAT Return the:

  • amount of output tax in box 1 (VAT due on sales)
  • amount of input tax in box 4 (VAT reclaimed on purchases)
  • full value of the supply in box 6 (total value of sales)
  • full value of the supply in box 7 (total value of purchases)

For example, you receive a reverse charge invoice from a company in France for €10,000.  You will pay the supplier €10,000. 

When you start preparing your VAT return, you need to manually calculate VAT on the €10,000 at the applicable rate, which is currently 20% in the UK, resulting in VAT of €2,000.

The resulting entries would be:

You then include in the relevant boxes of your VAT Return the following converted to GBP:

  • €2,000 in amount of output tax in box 1 (VAT due on sales)
  • €2,000 in amount of input tax in box 4 (VAT reclaimed on purchases)
  • €10,000 in full value of the supply in box 6 (total value of sales)
  • €10,000 in full value of the supply in box 7 (total value of purchases)

As the invoice value and the notional VAT are reported both under the sales and purchases sections of the same VAT return there is no VAT liability or recovery resulting from the transaction.

If you are the supplier of services from the UK to an EU customer, the invoices are raised without VAT and the total included in box 6 (total value of sales).

Modern accounting software such as Xero and QuickBooks, will handle this automatically and also take care of applying the exchange rate conversion for the VAT return.

If you need to manually calculate the exchange rate, the applicable rates are here.