With becoming VAT registered there come many responsibilities, one of which is ensuring you are accounting correctly for the VAT incurred on purchases of goods and services.
One of the complex factors is where your supply of goods or services is made. You may find suppliers from other countries are cheaper, but do you know how this will affect the VAT you can actually reclaim as well as how to account for these purchases on your VAT return?
This guide will provide the useful information when it comes to VAT in relation to making purchases of goods and services. Ensure you are using the correct rates when filling out your VAT return.
Disclaimer: Please use this post as a guide and refer to any links throughout, or at the end of, this guide. Note that the information contained in this guide is provided solely for information purposes and should not be taken as legal advice. Although we try to keep everything up to date, the tax system is ever-changing and it is best to consult a professional regarding your own personal circumstances.
Last updated: 31st January 2021
Contents:
– What’s with the jargon?
– VAT Rates Summary
– Services from Overseas Supplies (Reverse Charge)
What’s with the jargon?
First and foremost, let’s go over some unavoidable jargon which HMRC likes to use and which unfortunately follows you around when dealing with VAT. Bear in mind these definitions are used when dealing with VAT but may mean something else when put in a different context or in relation to a different tax.
Goods – any physical supply which you will use in your taxable supplies, whether relating to a service or goods that you supply. i.e. raw materials or finished goods.
Services – any supply which is typically not of tangible nature or which may not necessary relate to you acquiring physical goods. i.e. IT services or graphic design.
UK Supplier – a supplier which is established in the United Kingdom.
EU Supplier – this is a supplier who is established or situated in a European Union member state
Third Country Supplier – this is a supplier who is established outside of the UK and also isn’t situated in a European Union member state.
Reverse Charge – a mechanism used to account for VAT that would usually be charged on supplies of services made by suppliers from outside of the UK. Read more information.
VAT Rates on Purchases
| Type of Supplier | VAT Rate | |
|---|---|---|
|
UK Supplier |
Under scope of UK VAT. VAT rate depends on type of supply and whether the supplier is VAT registered. |
20% VAT on Expenses 5% VAT on Expenses Exempt Expense Zero Rated Expense |
|
EU Supplier (Goods) |
If you’re registered for VAT in the UK and receive goods from countries in the EU you’ll normally account for the VAT through your VAT Return. You’ll need to account for the VAT at the same rate that you would have paid if you had bought them from a UK supplier. This VAT is known as acquisition tax and you can normally reclaim this if the acquisitions relate to VAT taxable supplies that you make. |
Refer to rate on VAT certificate (form C79) or VAT invoice for goods |
|
Third Country Supplier (Goods) |
If you import goods that you’ve bought from non-EU countries they’re normally charged at the same rate as if they had been supplied in the UK at the customs. You can reclaim the VAT paid on the goods you’ve imported as input tax. You will need the import VAT certificate (form C79) to show that you’ve paid the import VAT. |
Refer to rate on VAT certificate (form C79) |
|
EU & Third Country Supplier (Services) |
Usually, reverse charge applies. If you provide your VAT, the supply should be zero-rated by the supplier. If you don't provide a VAT number (or aren't VAT registered), this is a B2C transaction and thus you may still be charged VAT by the supplier at local rates. You still must account for it under the reverse charge. |
Reverse Charge Expense (20%) |
Services from Overseas Suppliers (Reverse Charge)
When you buy services from suppliers in other countries, you may have to account for the VAT yourself – depending on the circumstances. This is called the ‘reverse charge’, and is also known as ‘tax shift’. Where it applies, you act as if you’re both the supplier and the customer. You charge yourself the VAT and then (assuming that the service relates to VAT taxable supplies that you make) you also claim it back. So the 2 taxes cancel each other out.
The reverse charge on services only applies when the supplier is in a different country from you, you’re in business, belong in the UK and receive either:
- one of the services that are covered by the general rule for place of supply of services
- certain other services covered in paragraph 18.11 of Notice 741A
You must account for the value of the services in sterling, so you must convert their value into sterling if the services were priced in any other currency. You can find out more about the reverse charge and services supplied from abroad in Notice 741A.
