VAT – reverse charge accounting for buyers
Updated June 2008
Question: Under what circumstances can standard rated goods be sold by a VAT registered business in the UK to another customer also based in the UK without a VAT charge being made?
Answer: The sale of mobile phones or computer chips to another VAT registered business in the UK, with an invoice value exceeding £5,000 excluding VAT!
You may have received an invoice from a supplier of mobile phones or computer chips (invoice value exceeding £5,000) with a cryptic comment added, (we have assumed a supply of £10,000 of mobile phones or computer chips):
“No VAT charged – output tax of £1,750 to be accounted for by customer to HMRC.”
This of course throws everyone in accounts into a state of confusion.
This is what the accounts team should do:
1. Post the £10,000 cost to the usual nominal code, purchases etc. If using Sage or similar accounting software “T0” the transaction so that no VAT is added to the purchase by the software.
2. Pay your supplier the amount charged, in our example £10,000.
3. Keep a copy of the invoice(s) in a file which you can access when the VAT return is being prepared.
4. When preparing your quarterly return add £1,750 to Box 1 (Output tax) and £1.750 to Box 4 (Input VAT)
So although notionally you have paid the £1,750 to HMRC by adding the amount to Box 1, you have also claimed it back as input VAT by adding it to Box 4.
That’s all you need to do.