Are you a UK-based business selling to the EU? How about an EU-based business trying to figure out VAT for sales made to UK businesses? VAT can be a complex process, especially when reverse charges are factored in.
In this article, we’ll break down everything you need to know about reverse charges, including the differences in sales made in Great Britain and Northern Ireland, how to identify reverse charges, and resources to help you maximize compliance.
What is a Reverse Charge?
A reverse charge occurs when a buyer records VAT instead of the seller. This situation is common in B2B transactions where the seller and buyer are registered for VAT in different countries. Generally, VAT is the responsibility of the seller; however, for simplicity in reporting cross-border payments, the seller can transfer the responsibility to the buyer.
The buyer will record both the seller’s output VAT and their own input VAT, effectively canceling each other out. The buyer must be registered and entitled to all VAT regulations and benefits, meaning they aren’t exempt or blocked.
Let’s say that you are registered for VAT in the UK and purchase services from a German company. The German company issues an invoice with no VAT applied. Once the invoice is received, you must calculate your own VAT obligation and apply the same rate that a similar purchase from a UK company would yield.
You will then add the additional VAT obligation to your return. However, you will also be able to offset the VAT with your input VAT, creating a neutral tax liability.
Handling UK Reverse Charges
In conjunction with the UK’s departure from the EU, there were some changes in how reverse charges were handled for UK-based businesses. Great Britain (England, Scotland, and Wales) is no longer considered an EU Member State, halting the application of reverse charges to EU sales. However, Northern Ireland continues to be treated as an EU Member State, allowing reverse charges. Let’s break down these differences in more detail.
Northern Ireland VAT Reverse Charges
Since Northern Ireland shares a border with the Republic of Ireland, the Brexit agreement included the Northern Ireland Protocol. This protocol preserves the Good Friday Agreement by leaving Northern Ireland as an EU Member State. VAT will apply to goods traveling between Northern Ireland and Great Britain.
For VAT reverse charge purposes, EC Sales and Intrastat declarations are still necessary. Sales made from Northern Ireland to an EU business will use reverse charges. However, if you’re selling from Northern Ireland to a Great Britain business, you will need to follow domestic VAT procedures.
Selling goods from EU to Northern Ireland will also require EC Sales and Intrastat declarations. Services sold from the EU to Northern Ireland are considered selling services to other parts of the UK, with no reverse charge capabilities.
VAT Between Great Britain and EU Businesses
Businesses based in Great Britain will not be able to use reverse charges. The business will treat the transaction as an export to a third territory. Businesses selling in Great Britain to the EU will need to pay import VAT. MOSS and Intra-EU simplifications are not available for the sale of services from the UK to the EU.
Handling US Reverse Charges
Reverse charges from businesses based in the United States are generally treated as purchases and sales made outside of the UK. For example, a business based in the US will not be able to apply reverse charges when purchasing goods from the UK. VAT will be paid upfront.
How to identify reverse Charge Transactions
When doing business in different regions, it’s important to understand how to identify reverse charge transactions. The first way you can tell is to look at your invoice. If you are generally subject to VAT, but don’t see any VAT on the invoice, it can indicate a reverse charge transaction.
Another indicator is understanding where you are selling to. If you are making sales to Great Britain as an EU business, reverse charges aren’t applicable. As a result, you should see VAT on your invoice. If there is no VAT apparent, contact the seller.
For transactions that you aren’t able to clearly discern if a reverse charge is in place, contact the seller. The seller can look into the details of your invoice and give you a concrete answer. Sometimes, invoices can contain mistakes, like omitting VAT, which is why it’s important to have open communication lines with your sellers.
Best practices to ensure compliance
Following Brexit, VAT compliance is important. Here are some best practices to ensure compliance with all VAT agencies:
#1 – Up-to-Date Accounting
Having up-to-date accounting is crucial for VAT compliance. Most companies issue invoices out of their accounting system or expense management software. Having correct invoice amounts ensures you are charging the correct VAT or recording accurate reverse VAT.
#2 – Compliant VAT Reporting Processes
Having robust VAT processes in place is another best practice. Understand which countries you are doing business with and how the reporting requirements differ. This gives you insight into the accuracy of invoices you receive and issue. Additionally, be aware of your filing obligations and how input and output VAT impacts your liability.
#3 – Integration of Software
Software can make all the difference when it comes to maintaining compliance with VAT agencies. Consider investing in an expense management system, like N2F, that tracks all vendor payments. This allows you to understand your VAT obligations and how reverse charges impact your reporting.
Getting Started
How does your business handle reverse VAT charges? With Northern Ireland handling reverse charges differently than Great Britain, it’s important to have the proper resources working alongside your team to maximize compliance. Reach out to a team member at N2F today to learn about how our platform helps you manage cross-border payments and VAT filing obligations.
