Accounting for VAT Reverse Charges (UK)

Normally, the supplier of a service must provide an accounting to the tax authorities for any VAT due on the service. However, for some services, if the recipient of the service is in an EU member country and the supplier is in another country, the recipient, rather than the supplier, must account for any VAT due on the service. This tax shift is referred to as a VAT reverse charge.

The reverse charge tax must be calculated as a percentage of each post. One tax account is posted as a debit and another tax account is posted as a credit. The reverse charge is used to create offsetting entries for goods between countries, when you want to record the transaction, but not make a payment.

Setting Up for VAT Reverse Charges

Ensure that these prerequisites are completed:

  • A category called Reverse Charge exists by default on the EU VAT Reporting Categories form. You can specify a description for it.
  • On the General Parameters form, ensure that Activate EU Reporting is selected.
  • On the Tax Codes form, set up a tax code with the tax rate that you want to assign to VAT reverse charges. Set the Category to Reverse Charge.

Example

Your company is purchasing a VAT-taxable service from a vendor in another country.

  1. A user sets up a tax code 19 with a 19% tax rate, and with the category set to Reverse Charge. The appropriate tax accounts are set, including the Acquisition VAT Account.
  2. A user creates a purchase order that is defined on the header level as taxable.
  3. The user adds a purchase order line for the service, and assigns tax code 19 to the PO line.
  4. After the purchase order is received, a user creates a voucher with the Generate A/P Transactions or Voucher Builder form.
  5. On the Voucher Adjustment Distributions form, you can see that offsetting tax entries were created; there are three distributions associated with the voucher, as opposed to the standard two distributions. The offset account number is derived from the Acquistion VAT Account that you set on the Tax Codes form.
  6. A user posts the voucher in the A/P Voucher Posting form.
  7. The voucher is displayed on the A/P Posted Transaction Summary form.
  8. On the VAT Report, users can sort by category. This allows you to see the transactions where the tax code has the Reverse Charge category.
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