The Reverse Charge
The reverse charge is a VAT accounting rule which is designed to simplify VAT.
The rule avoids the need for businesses to register for VAT (and complete VAT returns) in other EU Member States where they make sales. VAT is a EU tax and the “place of supply” can be where the customer is.
So, if you sell to France and Germany you are technically trading for VAT purposes in those countries. Instead of you registering for VAT and completing French and German VAT returns, your customer will do that on their return. They will be the supply and the purchaser.
This is why when you buy from EU businesses you need to do the adjustments on your UK VAT return. But, the adjustments are different for goods and services.
Sales of goods to EU
Zero rate the supplies and enter the sales amount in boxes 6 and box 8.
Sales to services to EU
Zero rate the supplies and enter the total sales in box 6.
Purchase of goods from EU
If you buy goods you must notionally charge yourself VAT, by entering it in box 2. Having ‘paid’ it, you can then reclaim the VAT by entering the same amount in box 4.
You must also include the cost of goods purchased that are subject to the reverse charge in box 7 and 9.
Purchases of services from EU
You must notionally charge yourself VAT, by including the VAT amount within box 1. Having ‘paid’ it, you can then reclaim the VAT by entering the same amount in box 4.
You must also enter the value of the purchase in Box 7.
The good news is that Xero software has made this easy – watch the video.