Do you use overseas providers for any of your needs such as advertising? If so, are you accounting for VAT correctly in respect of these services?
Take for example providers that are based in the Republic of Ireland and therefore do not have to charge VAT on the services that they supply to other VAT registered businesses in the European Union. Instead the onus is on their customers to apply the ‘reverse charge’ when completing their own VAT returns. In normal circumstances this means paying VAT on the supply but reclaiming the same amount as input tax. So far so good. Each reverse charge entry will cancel itself out and the net result will be no extra tax to pay.
There are however hidden dangers in the above scenario which, if ignored, can prove very costly to the unwary.
- First of all the reverse charge counts as a sale to yourself and so must be added to your turnover when calculating whether or not you have exceeded the VAT registration threshold. Late registration penalties will be levied for any business which fails to register on time.
- Secondly if a VAT registered business fails to apply the reverse charge their VAT returns will be incorrect and again penalties will be levied.
- And finally if a business if partially exempt from VAT, and can’t recover all of their VAT, the recovery of the tax self charged as a reverse cost will be restricted.
- If you feel that the reverse charge may apply to your business, or if you simply require assurance on this or any other VAT related matter, please contact our VAT consultant, David Fiddy, on firstname.lastname@example.org.