Changes have been made to handle Reverse Charge and EU Acquisition VAT for purchases of goods and services by UK Coins ERP+ clients. These changes will also help with two other requirements: partially recoverable VAT and partially zero-rated VAT.
Note that the handling of the Reverse Charge on sales of goods and services is excluded from the scope of this PDR as it is likely to be required by few, if any, UK Coins ERP+ clients.
Solution Outline
The outline of the solution is as follows:
A new VAT Code Substitution table in which users can define VAT Code substitutions mapping one source VAT Code to two or more target VAT Codes.
When transactions in Purchase Ledger, Subcontract Ledger and Cash Book are posted, Coins ERP+ checks the VAT distribution against the VAT Code substitution table and replaces any VAT distribution lines for VAT Codes listed in that table with multiple VAT distribution lines as defined in the table.
For example a VAT distribution for Reverse Charge Input VAT which would have a zero VAT rate (so that VAT would not be added to the payment) would be substituted with two VAT distribution lines: one for Output VAT at 20% and one for Input VAT at 20% (so that these entries would be posted and appear on the VAT Return).
Background
Normally VAT is calculated by the seller of goods and services and is added to the sales invoice. The VAT is then paid to the seller by the purchaser of those goods/services along with the purchase price. The VAT is paid over to HMRC by the seller on their VAT Return.
The purchaser may (subject to certain restrictions) recover that VAT from HMRC on their VAT Return. The Reverse Charge has been introduced in certain situations to prevent fraudulent abuse of the system. Where items fall within the scope of the Reverse Charge, the seller does not add VAT to their sales invoice and the payment by the purchaser does not include VAT. The purchaser then calculates the VAT that would otherwise have been charged by the seller and pays it over to HMRC on their VAT Return. The purchaser may also (subject to certain restrictions) recover that VAT from HMRC on their VAT Return.
The VAT on the sale and purchase on the purchaser’s VAT Return are thus normally equal and opposite resulting in a nil effect on the amount paid to HMRC. However, failure to include these entries on the VAT Return is an offence and is subject to substantial penalties.
For acquisition of goods from other EU countries, a process similar to the Reverse Charge applies, although this is technically known as Acquisition Tax rather than Reverse Charge.
Note: Following the EU Referendum result, the UK will remain a member of the EU until the exit process is completed. After that, it is likely that VAT rules will remain largely unchanged at least initially – dependent partly on the negotiated terms of exit from the EU. In the longer term, there is uncertainty as to what changes may be made to VAT. These changes provide for a solution with a significant amount of configurability which should offer a degree of flexibility to cope with future changes in requirements.
Situations where Reverse Charge VAT Applies
There are a number of different situations where the Reverse Charge applies in the UK:
EU Services Reverse Charge
The requirements for this are documented in Section 18 of VAT Notice 741A ‘Place of supply of services’ which was published on 24 Feb 2010.
The specified services to which the reverse charge applies are:
B2B general rule services from an overseas supplier;
Certain other services performed in the UK by an overseas supplier.
For the detailed definitions and exclusions see VAT Notice 741A.
The requirements are basically that the VAT amount is entered in both Box 1 and Box 4 of the VAT Return (assuming that the VAT is recoverable) and the net amount is entered in both Box 6 and Box 7 of the VAT Return.
Domestic Reverse Charge
The requirements for this are documented in VAT Notice 735 ‘VAT domestic reverse charge on specified goods and services’ which was first published on 1 Feb 2013 and last updated on 27 April 2015.
The specified goods to which the reverse charge applies are:
Mobile phones and computer chips (subject to a de minimis of £5,000);
Wholesale gas and electricity.
The specified services to which the reverse charge applies are:
Emission allowances.
For the detailed definitions and exclusions see VAT Notice 735.
The requirements are essentially the same as for the EU Services Reverse Charge except that the net amount of the services is not included in box 6 of the VAT Return.
EU Acquisitions Tax
The requirements for this are documented in VAT Notice 700 ‘The VAT guide’ which was first published on 1 Feb 2013 and last updated on 1 April 2015.
The specified goods to which the acquisition tax applies are:
Goods acquired into the UK from another EU country.
The accounting for acquisition tax is essentially the same as for Reverse Charge VAT although the entries on the VAT Return are slightly different. The requirements are basically that the VAT amount is entered in both Box 2 and Box 4 of the VAT Return (assuming that the VAT is recoverable) and the net amount is entered in Box 6, Box 7 and Box 9 of the VAT Return.