Reverse VAT confusion

[cannon999]

I was initially advised by the accountant that there is reversed VAT to be charged but I still fully don't understand how it applies and to be honest after reading some rules on the gov site I understand how reverse VAT applies here. My situation:
- Contract with a client to provide IT consultancy services (primarily software development).
- For part of this service I hire offshore developers who charge me £xx and I charge the client £xx + £yy + 20% VAT on top. So effectively that 20% VAT is just repaid to HMRC at the end of the quater because offshore developers don't charge any tax on top of their service.

However given what I have read about about reverse VAT tax I shouldn't be charging the client VAT in this scenario? The client only has a contract with my company and my company is based on UK so it seems logical that I charge VAT for the secondary service even if it is outsourced.

[malvolio]

VAT Accounting 101...

VAT is charged on the added value given when providing a service (the clue is in the name). YourCo is adding the value, not the people doing the work, so of course the invoice for the delivered service attracts VAT.

[cannon999]

VAT Accounting 101...

VAT is charged on the added value given when providing a service (the clue is in the name). YourCo is adding the value, not the people doing the work, so of course the invoice for the delivered service attracts VAT.

Yeah so that makes sense to me, I don't understand how reverse charge VAT comes in here.

[ladymuck]

IANAA

I thought the reverse charge VAT treatment was on services received from outside the UK, not on services provided. I would go with what Mal said as you can't not charge VAT if you're VAT registered.

Where is the client based?

[cannon999]

IANAA

I thought the reverse charge VAT treatment was on services received from outside the UK, not on services provided. I would go with what Mal said as you can't not charge VAT if you're VAT registered.

Where is the client based?

UK

[TheCyclingProgrammer]

The fact you’re outsourcing some of the work is completely irrelevant here.

All that matters is:

1. Are you VAT registered? (Yes)
2. Where your client is based.

If the answer to 2 is also the UK, you charge them VAT on top of whatever you’re charging them.

As to the services received by the outsourced suppliers, if they are outside the UK then it’s likely you need to account for these services under the reverse charge. This means you report them on your VAT a return as if you’d both supplied and received the service, but it’s VAT neutral. This is an entirely separate issue to what you are invoicing your client though.

[cannon999]

if they are outside the UK then it’s likely you need to account for these services under the reverse charge. This means you report them on your VAT a return as if you’d both supplied and received the service, but it’s VAT neutral. This is an entirely separate issue to what you are invoicing your client though.

Again someone is yet to explain to me why I need to do that..
I paid for a service that doesn't have anything to do with VAT, why do I need to do extra paperwork here?

[ladymuck]

Again someone is yet to explain to me why I need to do that..
I paid for a service that doesn't have anything to do with VAT, why do I need to do extra paperwork here?

I can only fathom the answer is 'because it's the law'

https://www.taxadvisermagazine.com/a...rge-challenges

It doesn't explain the why* but does help to explain the how.

I know Xero has a facility when you're recording purchases to add Reverse VAT code instead of a normal VAT code and this then does the 'in and out' bits for you with no extra paperwork required, and it all feeds through to your VAT return. Not sure what accounting system you use but I'd expect most to have this functionality.

* the main 'why' seems to be so overseas suppliers don't have to register for VAT in the UK but that just makes me think 'so what?'

[malvolio]

OK, so we're clear now that his is nothing to do with YourCo's client, only with YourCo's VAT recording.

Most countries have some form of sales tax that operates like VAT in that it adds a tax to a sales transaction. If your offshore supplier's home base has one, they will have included it in their invoices to you. AIUI (and ICBW...) the reverse VAT is merely the mechanism whereby you ignore that part of their invoicing for VAT accounting purposes, using the non-UK boxes we usually ignore on the VAT100: in essence, I've been charged this specific sum of money which is not input VAT so please ignore it.

How the numbers are worked out is a different question. If your accounting software doesn't do it for you, you need to talk to an accountant that understands non-UK invoicing.

[TheCyclingProgrammer]

For services, the purpose of the reverse charge is to ensure that VAT is accounted for in the place it makes most sense. Within the EU (and UK), VAT has to be accounted for somewhere.

Within the EU (and the UK rules are the same currently), for B2B the general rule for services is that they are supplied where the customer belongs (there are different rules for certain types of service though). This means the customer accounts for VAT instead of the supplier.

If the supplier accounted for VAT it would make it difficult for the customer to recover the VAT. By accounting for it at the customer end the customer can both account for and recover the VAT.

Also note that there are a number of “reverse charge” processes. Do not confuse them. The reverse charge on services is not the same as other reverse charges (such as the ones for construction and mobile phones/chips) and it’s also not the same process as accounting for VAT on imports and exports of goods.