Back to Basics: VAT invoicing & the reverse charge

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Back to Basics

VAT Invoicing & the reverse charge 9 March 2016


Your Speakers

Hugh Doherty Manager T +44 (0)207 728 2388

E [email protected]

Arsalan Aslam Executive T +44 (0)207 728 3285

E [email protected]


Agenda

1. The Importance of VAT Invoices

2. Contents of a VAT Invoice

3. Claiming Input VAT

4. VAT Records

5. Self-Billing

6. Reverse Charges


The information given on invoices establishes:

• the VAT liability of the supplier of goods or services and

• the entitlement of the customer to a deduction for the VAT charged.

VAT registered businesses are obliged by law to issue these invoices.

Suppliers should ensure that invoices accurately represent the

transactions to which they refer.

• By neglecting to apply the correct VAT rate, the supplier could be

exposed to penalties.

• The business customer may misinterpret the supply due to the

misleading description and may also be exposed to penalties should

they fail to account at the correct rate on the purchase.

Importance of VAT Invoices


VAT Invoices continued

When required?

Only VAT-registered businesses can issue VAT invoices and you must:

• issue and keep valid invoices - these can be paper or electronic

• keep copies of all the sales invoices you issue even if you cancel

them or produce one by mistake

• keep all purchase invoices for items you buy

Exceptions

You don’t need to issue a VAT invoice if:

• your invoice is only for exempt or zero-rated sales within the UK

• you're giving goods as a gift

• your customer operates a self-billing arrangement

• your customer is a non business customer (unless requested)


Contents of a VAT Invoice

Full VAT invoices are used for most transactions. Here is what should be

included:

1. Unique invoice number that follows on from the last invoice

2. Your business name and address

3. Your VAT Registration number

4. Date invoice raised

5. The tax point (or 'time of supply') if this is different from the invoice date

6. Customer's name or trading name, and address

7. Description of the goods or services

8. Total amount excluding VAT

9. Total amount of VAT (in pounds sterling)

10. Price per item and quantity

11. Rate of any discount per item

12. Rate of VAT charged per item

13. Appropriate reference if using an applicable margin scheme

14. Appropriate reference is the invoice is subject to the reverse charge

(and where applicable customs EU VAT number)


Claiming Input VAT

Normally input VAT credit will not be allowed without a correct invoice.

However, in exceptional circumstances alternative evidence can be

accepted, which could comprise of any of the following documents

(although anything that can support the claim can also be included):

• purchase order

• delivery notes

• records of payment

• records of the onward sales of the purchased items

• transport invoices/insurance

• supplier’s VAT number

Tribunal Decisions

Croydon Hotel & Leisure Ltd – no VAT invoice issued

JJ Newman – where invoices were destroyed

Read and Smith – invoices were lost


VAT Records

You should keep your VAT records for at least six years and must include:

• copies of all invoices you issue

• all invoices you receive (originals or electronic copies)

• self-billing agreements - this is where the customer prepares the invoice

• name, address and VAT number of any self-billing suppliers

• debit or credit notes

• import and export records

• records of items you can’t reclaim VAT on - e.g. business entertainment

• records of all the zero-rated, reduced or VAT exempt items you buy or

sell


Self-billing – an overview

'Self-billing' is an arrangement between a supplier and a customer.

Both customer and supplier must be VAT registered. The customer

prepares the supplier’s invoice and forwards a copy to the supplier with

the payment.

If you want to put a self-billing arrangement in place you don’t have to

tell HMRC or get approval from them. But you do have to get your

supplier to agree to the arrangement prior to the invoice being raised.

You'll need to:

• enter into an agreement with each supplier

• review agreements with suppliers at regular intervals

• keep records of each of the suppliers who let you self-bill them

• make sure invoices contain the right information and are correctly

issued


Self-billing agreements

The legally binding document must contain:

the supplier’s agreement that the self-biller can issue invoices on the

supplier’s behalf

the supplier’s confirmation that they won’t issue VAT invoices for goods

or services covered by the agreement

an expiry date - usually for 12 months time but it could be the date that

any business contract you have with your supplier ends

the supplier’s agreement that they’ll let the customer know if they stop

being registered for VAT, get a new VAT registration number or transfer

their business as a going concern

details of any third party the self-billing process will be outsourced to

Where an agreement is not in place, self-billed invoices will not be valid

and therefore the customer cannot reclaim the input tax shown on them.


The Reverse Charge

The reverse charge is when VAT is levied on most imported services by UK

VAT registered businesses. It's called the "reverse charge" because the

customer pays the VAT to HMRC, not the supplier.

Non-VAT registered businesses procuring reverse charge purchases are

included in determining whether they exceed the VAT registration threshold.

Scenario 1 - VAT on UK services

• UK supplier will charge UK VAT and declare the output tax to HMRC.

• UK VAT is charged on the supply of services, which the customer will

need to pay to the supplier.

• The VAT registered customer reclaims the VAT as input tax on their VAT

return.

So if the service is used to make taxable supplies, then the customer can

claim back all of the input tax. But if the customer is partially exempt – they

can only reclaim their recoverable % in the VAT return.


The Reverse Charge

Scenario 2 - VAT on imported services

• Paid a solicitor in Switzerland £1,000 for legal advice.

• No obligation to pay the VAT due to the supplier - the 20% VAT

charge is paid by including it as output tax (Box 1) on the VAT return as

though £200 VAT was charged on £1,000 worth of sales.

• The reverse charge allows the VAT to be claimed as input tax on the

VAT return.

• All the £200 VAT can be reclaimed if the legal fees were purchased to

make taxable supplies.

• If not directly attributable, the purchase is included as 'residual' in the

partial exemption calculation

The VAT recovery is exactly the same in both scenarios, whether the

solicitor is based in the UK and charges UK VAT, or import the services

VAT free from an overseas supplier. The only difference is that instead of

paying VAT to a UK solicitor, the VAT gets paid to HMRC by including it as

output tax on the VAT return.


The Reverse Charge - worked example

UK company makes a 20%

charge to itself in Box 1

UK customer recovers this

20% VAT as input tax in Box 4

UK customer will declare the

invoice amount in Box 7

VAT due in this period

on sales and other

outputs Box 1 £200

VAT reclaimed in this

period on purchases

and other inputs

(including acquisitions

from the EC)

Box 4

£200

Total Value of sales

and all other outputs

excluding any VAT Box 6 £1,000

Total Value of

purchases and all

other inputs excluding

any VAT

Box 7 £1,000

UK customer will declare the

same amount in Box 6


The Reverse Charge continued

The reverse charge applies to services where:

i. The services fall within the general place of supply rule

ii. the supplier belongs outside the UK

iii. the recipient is a 'relevant business person' who belongs in the UK

iv. the supply is not exempt from UK VAT

Which entity is making/receiving the

supply?

The UK position is that the establishment

making the supply is the one most closely

connected to it. Therefore, minimal

involvement in making the supply will not be

viewed as ‘intervening’.


Example 1 – Grant Thornton France

France

UK

Domestic UK VAT

UK UK

Branch Customer

OR

Head Office

?

?

?

?

? ?


Example 2 – Grant Thornton France

France

UK

UK UK

Subsidiary Customer

Parent


The Reverse Charge Mechanism

UK Company UK Company

UK company

makes a charge

of 20% on its

invoice

UK customer

recovers this

20% VAT as

input tax

The net VAT effect

of this transaction is

nil

FR Company UK Company

French company does not charge

FR VAT on its invoice, instead

quoting its customer's VAT number

UK customer will self-account for

VAT under the reverse charge:

- 20% output tax

- 20% input tax

This is as if the supply had

been made in the UK

The net VAT effect

of this transaction is

nil. However, there

is a cash flow

benefit as the UK

customer will not

need to pay any

VAT and claim it

back. Instead, it

self-accounts for

both output and

input tax which has

a nil effect There is no advantage to being in a 'low-tax'

regime as, for VAT purposes, the cross-

border regime allows for the equalisation of

VAT.


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Back to Basics: VAT invoicing & the reverse charge

Economy & Finance

Transcript of Back to Basics: VAT invoicing & the reverse charge