VAT reverse charge on specified goods and services

HMRC Reference: Notice 735 (February 2013)
 

Contents

Foreword

Other relevant notices

1.Introduction

1.1 What is this notice about?

1.2 What has changed?

2.The law

3.To which specified goods and services does the reverse charge apply?

3.1 What are the specified goods and services?

3.2 What is meant by 'mobile phones'?

3.3 What is meant by 'computer chips'?

3.4 What is meant by 'emissions allowances'?

4.Supplies excluded from the reverse charge

5.How does the reverse charge work?

6.The de minimis rule for goods

6.1 General

6.2 Does the de minimis rule apply to specified services?

6.3 What if I make mixed supplies?

6.4 What if I issue multiple invoices in relation to a single purchase order?

6.5 What if I make multiple sales in a single day to a single VAT registered customer?

6.6 What if I receive multiple purchases made in a single day from a single VAT registered supplier?

6.7 Unconditional and contingent discounts or delayed reductions in price

7.What if I make a reverse charge supply?

7.1 Sales to other businesses

7.2 Sales to non VAT registered customers

7.3 Invoicing

7.4 Completion of your VAT return

7.5 Completion of the Reverse Charge Sales List (RCSL)

8.What if I receive a reverse charge supply?

8.1 General

8.2 Onward sales of specified goods and services purchased under the reverse charge

8.3 What if I am not registered for VAT but purchase specified goods and services?

8.4 What if I receive goods or services subject to the reverse charge from someone who is not based in the UK?

8.5 Completion of your VAT return

8.6 Failure to comply with the reverse charge procedure

8.7 Disaggregation of purchases

9.What checks should I carry out on my customer?

9.1 Introduction

9.2 Reasonable checks

9.3 What if I have doubts about the bona fides of my customers or their VAT status?

9.4 Retailers, including internet retailers

9.5 Disaggregation

9.6 Consequences of getting it wrong

10.Specific accounting issues

10.1 Adjustments in the course of business

10.2 Return not yet made

10.3 Return already made and price adjustment removes the supply out of the reverse charge

10.4 Credit and debit notes

10.5 I use the Payment on Account scheme - how does the reverse charge affect me?

10.6 Bad debts

10.7 Self-billing

10.8 How does the reverse charge affect accounting schemes?

10.9 Specific cases

10.10 What if I've made a mistake?

11.The RCSL

11.1 General

11.2 When must I notify HMRC?

11.3 How does the RCSL system work?

11.4 Submitting your RCSL

11.5 What if I fail to submit my RCSL?

Your rights and obligations

Do you have any comments?

Putting things right

How we use your information

 

Foreword

This notice cancels and replaces Notice 735 (June 2008). Details of any changes to the previous version can be found in paragraph 1.2.

Other relevant notices

  • 700 The VAT guide
  • 700/35 Business gifts and samples
  • 700/45 How to correct VAT errors and make adjustments or claims
  • 700/60 Payments on account
  • 718 Margin schemes for second-hand goods, works of art, antiques and collectors items
  • 726 Joint and several liability in the supply of specified goods
  • 741: Place of supply of services (before 1 January 2010)
  • 741A: Place of supply of services - from 1 January 2010

1.Introduction

1.1 What is this notice about?

The VAT reverse charge procedure is an anti-fraud measure designed to counter criminal attacks on the UK VAT system by means of sophisticated fraud.

This notice explains the VAT reverse charge procedure, which applies to the sale and purchase of specified goods and services.

This notice also explains when the receipt of specified goods and/or services by a non-VAT registered business makes it liable to be registered for VAT.

This notice assumes that you have a working knowledge of basic VAT principles, as outlined in 700 The VAT guide.

1.2 What has changed?

This notice has been re-written:

  • to include details of the application of the reverse charge procedure to emissions allowances in the UK,
  • address situations where supplies are disaggregated, and
  • for general readability.

2.The law

The relevant law relating to the reverse charge on specified goods and services is set out in:

  • Section 55A of the Value Added Tax Act 1994,
  • Sections 65 and 66 of the VAT Act 1994 (in relation to penalties with regard to the Reverse Charge Sales List (RCSL)),
  • Regulations 23A-23D of Part IV of the VAT Regulations 1995 (in relation to the RCSL), and
  • Value Added Tax (Section 55A)(Specified goods and services and excepted supplies) Order 2010.

This notice explains how we interpret the law.

3.To which specified goods and services does the reverse charge apply?

3.1 What are the specified goods and services?

The specified goods to which the reverse charge applies are:

  • mobile phones; and
  • computer chips.

The specified services are:

  • emissions allowances.

What is meant by 'mobile phones', 'computer chips' and 'emissions allowances' is explained in the following paragraphs.

3.2 What is meant by 'mobile phones'?

For the purpose of the reverse charge, the definition of a mobile phone takes its everyday meaning in the UK and includes:

  • any handsets which have a mobile phone function (i.e. the transmitting and receiving of spoken messages), whether or not they have any other functions – it therefore includes other communication devices, such as Blackberrys;
  • mobile phones supplied with accessories (such as a charger, battery, cover or hands-free kit) as a single package;
  • pre-pay (or ‘pay as you go’) mobile phones, whether or not the selling price includes an element attributable to the cost of future use of the phones; and
  • mobile phones locked to a network but not supplied with a contract for airtime.

However, the reverse charge does not apply to the following:

  • mobile phones which are supplied with a contract for airtime, including the supply of several mobile phones over a period of time under an on-going contract for airtime;
  • mobile phone accessories which are supplied separately from a mobile phone;
  • walkie-talkies;
  • WiFi phones unless also intended for use with mobile phone networks;
  • tablet devices; and
  • 3G data cards and WiFi cards.

3.3 What is meant by 'computer chips'?

The terminology surrounding computer chips can be confusing. As a guide, all computer chips covered by the reverse charge fall within commodity code 8542 3190 00. The term covers:

  • small integrated circuit (i.e. Central Processing Units or CPUs);
  • discrete integrated circuit devices, i.e. Microprocessors or Microprocessor Units (MPUs) and Microcontrollers or Microcontroller Units (MCUs); and
  • chipsets – the dedicated cluster of integrated circuits which support MPUs.

The reverse charge applies to such items when they are in a state prior to integration into end-user products, or where they are sold separately and not as part of an assembled item, for example a motherboard.

Items such as computer servers, laptops, desktop units or tablets are excluded from the scope of the reverse charge.

3.4 What is meant by 'emissions allowances'?

Only those compliance market credits which can be used to meet obligations under the EU Emissions Trading Scheme (EUETS) are subject to the reverse charge mechanism. These currently comprise EU Allowances, some Certified Emission Reductions (CER) and some Emission Reduction Units (ERU), as defined in Directive 2003/87/EC (as amended).

4.Supplies excluded from the reverse charge

Supplies of specified goods or services in the following circumstances are always excluded from the reverse charge procedure:

  • supplies to customers for non-business use;
  • supplies for which the seller chooses to use the second-hand margin scheme - further details of this can be found in Notice 718
  • cross border transactions for specified goods and services, although the reverse charge on International services may apply (see Notices 741 and 741A);
  • specified goods and services which a business gives away for no consideration - these may be deemed supplies on which the supplier is required to account for VAT. Further information can be found in Notice 700/35.

5.How does the reverse charge work?

The reverse charge only applies to the sale and purchase of specified goods and services:

  • between UK taxable persons,
  • for goods, where the VAT exclusive value of the supply is above the de minimis limit (paragraph 6), and
  • where the goods and services are bought and sold for business use.

It is the responsibility of the customer, rather than the supplier, to account to HM Revenue & Customs (HMRC) for VAT on supplies of the specified goods or services.

For example:

  • ABC Ltd, a VAT registered distributor, sells a quantity of mobile phones to 123 Ltd, a VAT registered retailer, for a VAT-exclusive value of £6,000.
  • ABC Ltd does not charge VAT on the supply, specifying on its invoice that the reverse charge applies (see paragraph 7.3 with regard to invoicing procedures).
  • 123 Ltd will account for ABC Ltd’s output tax but will reclaim the exact same amount as input tax.

If you are selling these goods and services you should read paragraphs 7 and 9. If you are buying these goods and services you should read paragraph 8.

6.The de minimis rule for goods

6.1 General

The reverse charge does not apply to supplies of goods with a VAT-exclusive value below £5,000. This is known as the de minimis limit.

The de minimis limit is calculated on an invoice basis, i.e. the reverse charge applies if the total VAT-exclusive value of all the specified goods shown on an invoice is £5,000 or more. In that event, the reverse charge applies to the total value of the specified goods on that invoice.

However, there are specific circumstances when the total value of individual invoices will determine whether the reverse charge should be applied. This is dealt with in paragraphs 6.5 and 6.6.

6.2 Does the de minimis rule apply to specified services?

The de minimis rule does not apply to specified services, no matter what the value. This means that if you make a specified supply you must apply the reverse charge procedure.

6.3 What if I make mixed supplies?

If supplies of any other goods or services are shown on the same invoice as the reverse charge goods, the reverse charge does not apply to the other supplies, but will apply to the specified goods and services.

If an itemised invoice relates to a single supply, for example a computer, which is not subject to the reverse charge, VAT should be charged as normal on the supply, even if some of the itemised components are reverse charge goods.

6.4 What if I issue multiple invoices in relation to a single purchase order?

Many businesses issue several separate invoices in relation to a single purchase order, e.g. a separate invoice for each delivery which satisfies the single purchase order. Where the single purchase order value is larger than the individual invoice value, it will be acceptable to apply the reverse charge to all invoices relating to the single purchase order so long as the purchase order value exceeds the £5,000 threshold, if both parties agree.

6.5 What if I make multiple sales in a single day to a single VAT registered customer?

Where you make multiple sales of specified goods in a single day to a single VAT registered customer the VAT-exclusive value of the goods should be added together to determine whether the de minimis limit has been exceeded. This is dealt with in more detail in paragraph 9.5.

6.6 What if I receive multiple purchases made in a single day from a single VAT registered supplier?

Where you receive multiple purchases of specified goods in a single day from a single retail outlet or supplier the VAT-exclusive value of the goods must be added together to determine whether the de minimis limit has been exceeded. This is dealt with in more detail in paragraphs 8.6 and 8.7.

6.7 Unconditional and contingent discounts or delayed reductions in price

Where VAT is due on a value reduced by an unconditional discount then the discounted value is to be used to establish the value for the purpose of applying the de minimis rule. However, where there are contingent discounts or a delayed reduction in price, the full value shown on the invoice is to be used.

Further information on the definition of these discounts can be found in Notice 700.

7.What if I make a reverse charge supply?

7.1 Sales to other businesses

7.1.1 General

The reverse charge only applies to supplies where:

  • your customer is registered or liable to be registered for UK VAT,
  • is buying the goods for a business purpose, and
  • the VAT exclusive value of any specified goods is above the de minimis limit (but see paragraphs 6.2, 6.5 and 6.6).

7.1.2 What if I sell goods or services subject to the reverse charge to a business not based in the UK?

The rules and procedures for dispatches of goods to persons in another Member State and for exports outside the EU are unaffected by the reverse charge. This means that if you make a supply of specified goods or services to someone outside the UK you should not apply the reverse charge procedure for specified goods and services. However, your supply of services might still fall to be covered by the reverse charge on International services (see Notices 741 and 741A).

7.1.3 What if I am unsure if my customer is a VAT registered business?

If you are selling goods or services under the reverse charge procedure you need to obtain your customer’s VAT registration number and satisfy yourself, as far as possible, that the number is genuine and the goods or services are being bought for a business purpose. Paragraph 9 gives guidance about the checks you should undertake for this purpose.

7.2 Sales to non VAT registered customers

Where you make a supply of specified goods or services to a customer who is not VAT registered or is not liable to be registered for UK VAT the reverse charge procedure does not apply. In such instances VAT should be applied in the normal way.

7.3 Invoicing

7.3.1 Paper invoices

When making a sale to which the reverse charge procedure applies, you must show all the information normally required to be shown on a VAT invoice and must also include a reference on the invoice to make it clear that the reverse charge applies and that your customer is required to account for the VAT. The amount of VAT to be accounted for under the reverse charge must be clearly stated on the invoice but should not be included in the amount shown as total VAT charged.

Under EC law and the VAT Regulations 1995, with effect from 01 January 2013, invoices for reverse charge supplies, when the customer is liable for the VAT, must include the reference 'reverse charge'.

The precise annotation for reverse charge invoices is not prescribed in law. However, it must include the words 'reverse charge'. The following examples fulfil the legal requirement:

  • Reverse charge: VAT Act 1994 Section 55A applies
  • Reverse charge: S55A VATA 94 applies
  • Reverse charge: Customer to pay the VAT to HMRC

If you produce invoices using an IT system, and that system cannot show the amount to be accounted for under the reverse charge mechanism, then the wording should state that VAT is to be accounted for by your customer at the standard rate of VAT, based on the VAT exclusive selling price for the reverse charge goods or services. However, your customer must be able to identify the reverse charge goods or services, and a legend such as the following may be helpful:

  • Customer to account to HMRC for the reverse charge output tax on the VAT exclusive price of items marked reverse charge.

7.3.2 Electronic invoices

HMRC will allow the use of electronic invoices that use a coded representation rather then textual form provided that the content can be demonstrated to an HMRC auditor by both parties to the electronic invoicing exchange. This is subject to the agreement of both parties.

7.4 Completion of your VAT return

Where you make a reverse charge supply you must include the VAT-exclusive value of that supply in the total value of sales in box 6 of your VAT return – there is no output tax to include in box 1, because that is the responsibility of your customer.

7.5 Completion of the Reverse Charge Sales List (RCSL)

Where you have made a reverse charge supply of goods (but not services) you must notify HMRC when you first do so, and complete a reverse charge sales list when you submit your VAT return. This is explained more fully in paragraph 11.

8.What if I receive a reverse charge supply?

8.1 General

If you are a UK VAT-registered business, or are liable to be registered for UK VAT, and have not been charged VAT because the reverse charge procedure applies, you must account for the VAT due on the supply. The amount of VAT should be shown on the VAT invoice issued by your supplier (see paragraph 7.3). You must account for the VAT on the VAT return for the period in which you received the supply. The normal tax point rules apply for determining when the supply is made and received.

You may reclaim this VAT as input tax on the same return as it is accounted for, subject to the normal rules, including any partial exemption restriction that may apply (see paragraph 8.5).

8.2 Onward sales of specified goods and services purchased under the reverse charge

If you purchase specified goods or services and then sell them to another UK VAT-registered business, or a business that is liable to be registered for UK VAT, and the VAT exclusive invoice value of the goods is £5,000 or more (see paragraph 6), then the reverse charge applies to the onward sale (see paragraphs 7 and 9).

If the goods or services are sold in any other circumstances, then the appropriate normal VAT accounting rules for the transaction must be followed. This includes submission of an EC Sales List in respect of goods supplied to a customer in another Member State where applicable, and completion of the RCSL (see paragraph 11).

8.3 What if I am not registered for VAT but purchase specified goods and services?

If you are not VAT-registered you may need to consider whether the purchase of specified goods and services makes you liable to be registered for VAT.

8.3.1 For goods

If you make individual purchases of specified goods for a VAT exclusive value of £5,000 or more you have to include these amounts when considering whether the value of your taxable supplies has exceeded the VAT registration threshold. The first £1,000 of such purchases per month is disregarded, so if you purchase specified goods above this amount you will not have to take them into account.

However, the total value of purchases to which the reverse charge would apply in excess of £1,000 per month does count, along with your other taxable supplies, towards your liability to register for VAT. For example, if you sell a total of £1,200 in a month the £200 is to be taken into account. That value should therefore be included both in calculating the value of taxable supplies in the previous 12 months or less, and in the expected value of taxable supplies in the next 30 days alone, for the purpose of applying these tests for liability to register for VAT.

8.3.2 For services

Unlike for specified goods, there is no £5,000 de minimis limit. So when purchasing services you must consider these amounts, no matter what the value, when considering whether your taxable supplies have exceeded the VAT registration threshold. However, the first £1,000 of such purchases per month is disregarded, so if you purchase specified services below this amount you will not have to take them into account.

However, the total value of purchases to which the reverse charge would apply in excess of £1,000 per month does count, along with your other taxable supplies, towards your liability to register for VAT. That value should therefore be included both in calculating the value of taxable supplies in the previous 12 months or less, and in the expected value of taxable supplies in the next 30 days alone, for the purpose of applying these tests for liability to register for VAT.

8.4 What if I receive goods or services subject to the reverse charge from someone who is not based in the UK?

If you receive goods and services that fall into the category specified for reverse charge purposes from entities located outside the UK the reverse charge will not apply. However, if you then supply those goods you should read paragraphs 7, 8.2, 9 and 11.

8.5 Completion of your VAT return

You must enter the output tax payable on purchases under the reverse charge in box 1, but the VAT exclusive value of the purchases must not be entered in box 6.

Input tax may be reclaimed, subject to the normal rules, by including it in the total shown in box 4. The VAT exclusive value of the purchases should be entered in box 7 in the normal way.

8.6 Failure to comply with the reverse charge procedure

Failure to apply the reverse charge may arise as an oversight or where you have been unable to provide your supplier with a VAT registration number because a number is still awaited from HMRC. Where you do not account for the reverse charge when you should, we may assess for your supplier's output tax, which you should have entered on your own VAT return.

Given that the reverse charge is there to prevent VAT being stolen in the supply chain, failure to notify your supplier that the reverse charge should be applied will be viewed by HMRC as suspicious. If you take no action to correct the situation when the reverse charge should apply you may put yourself in a position where:

  • you could be held to be jointly and severally liable for any VAT loss elsewhere in the supply chain (see Notice 726 Joint and several liability for unpaid VAT);
  • if you knew or should have known that your transactions were connected with fraudulent evasion of VAT you will loose your right to deduct the input tax.

8.7 Disaggregation of purchases

Where HMRC suspects that you are disaggregating your purchases in order to circumvent application of the reverse charge procedure we will consider assessing you for your supplier's output tax, which you should have entered on your own VAT return. You might also incur penalties and interest.

9.What checks should I carry out on my customer?

9.1 Introduction

Whether goods or services are eligible goods or services or whether the goods are being sold in quantities above the £5,000 de minimis threshold (paragraph 6) is something about which you, as the supplier, will have first hand knowledge. But for the reverse charge to apply, the goods or services must also be sold to a taxable person for a business purpose, and you may not have first hand knowledge of your customer or his VAT status.

This section provides guidance to you as a supplier about the checks you are expected to make. Paragraph 9.6 outlines the consequences of getting this wrong.

9.2 Reasonable checks

Paragraph 9.6 explains that you will not be held liable for incorrect application of the reverse charge where you have taken reasonable steps to establish the VAT status of your customer. What is reasonable in any case will depend on norms in the sector and the type of relationship you have with your customer. The following are indicators to assist you in deciding how far you should go before accepting a customer’s bona fides. They should not be taken as an exhaustive or definitive list.

  • Do commercial checks on creditworthiness and customer status suggest any reason to doubt your customer’s bona fides?
  • Is the VAT registration number genuine and does it belong to the person who is quoting it? You may use the checking facility provided by our advice service / Helpline (see the closing section of this notice). Large businesses may contact their Client Relationship Manager for advice.
  • Is this a new customer or a well-established business known to you? In general there is no need for you to carry out special verification of the VAT registration numbers of existing customers with whom you have an established trading relationship.
  • Is there any indication in the pattern of orders that your customer is attempting to disaggregate his purchases in order to circumvent the £5,000 de minimis?
  • Have you any grounds to doubt the bona fides of your customer?
  • Are there features or circumstances that are out of the ordinary in respect of the transaction? If so, establish the reasons are credible.

There is further advice in Notice 726 relating to the integrity of a supplier and this applies equally to that of the customer.

You should keep evidence of the checks you have performed, so they can be produced to HMRC if required.

9.3 What if I have doubts about the bona fides of my customers or their VAT status?

If you cannot be satisfied of the bona fides of your customer or the status of his VAT registration then you must consider whether you should proceed with the transaction.

If you proceed with a reverse charge transaction where there are doubts that the reverse charge applies, you may wish to consider asking your customer for a deposit equivalent to the output tax for which he will become liable if the reverse charge is applied in error. This may be especially helpful if your customer has applied for but not yet received a VAT registration number. Any deposit taken in these circumstances can be refunded when evidence of the VAT registration number is received.

9.4 Retailers, including internet retailers

9.4.1 General

The checks suggested in paragraph 9.2 can be applied by retailers and internet traders. Clearly there are fewer long term relationships with customers in the retail sector and so commercial checks and other checks to prevent fraud or money laundering may be more relevant but there will be situations, for example repeat or pre-ordered bulk sales, where the checks in paragraph 9.2 will also apply to retailers and internet traders.

If, for a transaction over £5,000 in value(excluding VAT), you are unable to carry out the necessary checks to satisfy yourself of your customer’s bona fides and, in particular, that a VAT registration number which has been quoted belongs to that person, then VAT should be charged in the normal way. We would expect this to be the norm for most retail customers.

9.4.2 When this paragraph applies

For the purpose of this paragraph:

  • retail sales include internet sales where those sales are mainly geared to selling to non-business customers and where payment is generally demanded before the goods are dispatched;
  • where a business has both retail and non-retail parts of its business, this paragraph only applies to the retail part.

A business, or part of a business, that only makes incidental retail sales is not classed as a retailer for the purposes of this paragraph.

9.5 Disaggregation

9.5.1 Where you are a retailer

Indicators that a customer may be seeking to disaggregate a supply might include:

  • the pattern of orders you receive from your customer, or
  • the same person or persons making multiple purchases per retail outlet or other source per day.

Where you have undertaken reasonable checks, as outlined in paragraph 9.2, and are satisfied that your customer is VAT registered but is seeking to disaggregate you should apply the reverse charge procedure. Where you have reasonable doubts about whether your customer is VAT registered or is seeking to disaggregate you must charge VAT at the standard rate.

9.5.2 Where you are a wholesaler

If you are a wholesaler or acting as a wholesaler indicators that a customer may be seeking to disaggregate a supply might include orders kept below the £5000 de minimis limit for no obvious commercial reason, for example several orders are made at the same time or within a short space of time.

Where you have undertaken reasonable checks, as outlined in paragraph 9.2, and are satisfied that your customer is VAT registered but is seeking to disaggregate you should apply the reverse charge procedure. Where you have reasonable doubts about whether your customer is VAT registered or is seeking to disaggregate you must charge VAT at the standard rate.

9.6 Consequences of getting it wrong

If you apply the reverse charge and have taken sufficient steps to check the bona fides of your customer but have been deliberately misled by them, then you will not be required to account for output tax on the sale. Similarly, if you have correctly applied the reverse charge to a sale, then you will not be required to account for output tax if your customer fails to do so.

If you apply the reverse charge incorrectly or have not taken sufficient steps to check the bona fides of your customer then you will be liable to pay the output tax on the sale.

If you incorrectly charge VAT when the reverse charge should have been applied then your customer will be assessed for the output tax which will offset any entitlement to input tax recovery. You will then have to credit your customer with the VAT, returning any money collected as VAT. You will also be subject to the normal error correction procedures and possibly penalties (see Notice 700/45).

10.Specific accounting issues

10.1 Adjustments in the course of business

Where a supplier offers a credit or contingent discount, if both parties agree the concession in paragraph 18.2.1 of Notice 700, which allows both parties not to make VAT adjustments, can be applied to reverse charge adjustments. In the case for a supply of goods, where this option is used adjustments will still be required to the Reverse Charge Sales List (see paragraph 11.10). We believe the complexities involved in making adjustments are likely to make this the easiest option, but the other methods are set out in paragraphs 10.2 to 10.4.

Adjustments could be required, for example because of changes in price after the invoice has been issued, or because of returned goods.

The customer adjusts both their output tax and input tax accounts under Regulation 38 of the VAT Regulations 1995 if:

  • a supply is one to which the reverse charge procedure applies;
  • its value changes but, at its revised value, it remains within the reverse charge procedure; and
  • this change takes place after the prescribed accounting period of the customer in which the original supply took place.

The supplier adjusts their output tax and the customer adjusts both their output tax and input tax accounts under Regulation 38A of the VAT Regulations 1995 if:

  • a supply is one to which the reverse charge procedure applies;
  • its value changes and, at its revised value, it is outside the reverse charge procedure on mobile telephones and computer chips; and
  • this change takes place after the prescribed accounting period of the supplier in which the original supply took place.

In all circumstances, the object of the adjustment is to bring the correct amount of VAT to account.

10.2 Return not yet made

If as supplier or customer you identify a change in the value of reverse charge goods and services before your accounting period is closed, you can simply adjust your primary records of the sale/purchase and make sure the corrected figure feeds through to the VAT account.

10.3 Return already made and price adjustment removes the supply out of the reverse charge

If both parties agree, the original VAT treatment need not be reversed although for goods an adjustment to the Reverse Charge Sales List will still be required (see paragraph 11.10). If they do not agree, the supplier will need to bring output tax to account and collect the VAT due on the supply from his customer. The customer will need to reverse the output tax he has entered and correct the input tax entry to reflect the corrected value. In this case, we recommend the whole of the original supply is credited and then re-invoiced by the supplier in the normal way, showing the VAT chargeable on the supply.

10.4 Credit and debit notes

Credit and debit notes record an adjustment to the original supply and their treatment depends on whether the reverse charge applied in the first instance.

Suggested forms of words for credit notes where the reverse charge did apply are:

  • Reverse charge: Customer to account for the output tax adjustment of -£X to HMRC
  • Reverse charge: UK customer to account for the output tax adjustment of -£X to HMRC
  • Customer to account to HMRC for the adjustment to reverse charge output tax on the VAT exclusive price of items marked reverse charge.

Where the output tax liability reverts to the supplier as a result of a decrease in consideration, as noted above, we recommend the whole supply is credited and then re-invoiced by the supplier in the normal way. If using credit notes the following would also be acceptable:

  • Reverse charge: Customer to account for output tax adjustment of -£X to HMRC, supplier now accounts for £Y output tax to HMRC.

10.5 I use the Payment on Account scheme - how does the reverse charge affect me?

The Payment on Account (POA) regime requires businesses with a total VAT liability of £2.3 million or more in a period of 12 months or less, and tax periods exceeding one month to make monthly payments on account. As some businesses may be required to account for output tax on their purchases as well as on the onward sale to non-business customers, the reverse charge may have the effect of increasing their net VAT liability. This can have the effect of bringing them within the scope of POA, or of increasing their monthly payments if they are already within the regime.

The POA regime has been amended to allow affected businesses to apply to HMRC to exclude the output tax due under the reverse charge from the calculation to establish whether a business is subject to POA or the monthly payments a business in POA has to make. Applications for such exclusion should be made to:

Payment on Account Team
4th Floor, Regian House
James Street
Liverpool
L75 1AD.

Some businesses may find that their net liability will decrease under the reverse charge. If that is the case, then the normal rules outlined in paragraph 3.2 of Notice 700/60 apply.

10.6 Bad debts

Bad debt relief does not apply with reverse charge supplies as it is the customer who accounts for the tax. However, where the customer has to adjust input tax recovery because part or all of the consideration is unpaid after 6 months (perhaps because of a disputed charge), then they may make a corresponding adjustment reducing the output tax accounted for.

Further information on bad debt relief can be found in Notice 700/18.

10.7 Self-billing

Under a VAT self-billing arrangement it is the customer who issues the invoice on behalf of the supplier for the supplies he has purchased and received from the supplier. The reverse charge does not affect the self-billing procedure itself. It is the responsibility of the business issuing the self-billed invoice to apply the revised accounting procedure. If the reverse charge applies then the purchaser will be the person issuing the invoice and accounting for the VAT on the supply. The invoice should not charge VAT and should indicate that the purchaser will be accounting for the VAT itself. However, for goods the supplier will be required to complete the Reverse Charge Sales List - see paragraph 11.

Suggested forms of words that can be included on a VAT self-billing invoice are:

  • Reverse charge: We will account for and pay output tax of £X to HMRC
  • Reverse charge: As the UK customer we will pay O/T of £X to HMRC.

Alternatively, any of the following are also acceptable, provided that the amount of VAT is shown elsewhere on the invoice (but not in the box for total output tax charged):

  • Reverse charge: VAT Act 1994 Section 55A applies
  • Reverse charge: S55A VATA 94 applies
  • Reverse charge: We will account for the VAT to HMRC
  • Reverse charge: We will pay the VAT to HMRC

10.8 How does the reverse charge affect accounting schemes?

10.8.1 Flat Rate Scheme

Supplies to which the reverse charge applies are excluded from the Flat Rate Scheme. Any such supplies received and made should be accounted for under the reverse charge provisions.

10.8.2 Cash Accounting Scheme

Businesses using the cash accounting scheme should exclude sales and purchases to which the reverse charge applies from the scheme. These supplies should be accounted for under the reverse charge provisions. However, if a business purchases goods and services to which the reverse charge applies and sells them on so that it does not (e.g. under the de minimis rules or because the sale is to a non-business customer), then the onward sale should be dealt with under the cash accounting scheme.

10.8.3 Annual Accounting Scheme

The annual accounting scheme is unaffected by the reverse charge and can be used in the normal way with reverse charge supplies being accounted for within the scheme.

10.8.4 Margin scheme for second-hand goods, works of art, antiques and collectors items

The margin scheme is one which businesses can elect to use for the sale of eligible goods. If you use it for eligible second-hand mobile phones and computer chips the reverse charge does not apply and the VAT payable is calculated under the margin scheme rules.

10.9 Specific cases

10.9.1 Charities and Local Authorities

These types of organisations may purchase goods and services to which the reverse charge applies which will be used partly for business purposes and partly for non-business purposes. In such cases, the reverse charge applies as normal. The customer should account for output tax under the reverse charge mechanism and apply the appropriate restriction to the deduction of the resulting input VAT.

10.9.2 National Health Service and Government Departments

Where supplies of goods and services subject to the reverse charge are made to the NHS and Government Departments for any element of business purpose then the reverse charge applies as normal. The customer should account for the VAT and restrict the recovery of the input tax as appropriate.

10.10 What if I've made a mistake?

Mistakes made under the reverse charge procedure are to be dealt with in a similar manner to other errors involving VAT – see Notice 700/45.

11.The RCSL

11.1 General

You need only submit an RCSL if you make supplies of specified goods. You must not include supplies of specified services.

If you make supplies of goods to which the reverse charge has applied (reverse charge sales) you must notify HMRC and submit regular RCSLs using the RCSL system. Your accounts software may have the facility to export the required data, in the required format, for you. Alternatively you have the option to key the required information into a web page.

11.2 When must I notify HMRC?

You must tell us of the date on which you first make a reverse charge sale. You must also give us the name and telephone number of a contact. If you then cease to make such supplies you must tell us of the date on which you ceased to do so. However, if you subsequently again make reverse charge sales you must notify us of the date you recommenced, and again provide contact details.

In each case you must tell us within 30 days of the event.

If you fail to submit your RCSL you will be charged a penalty calculated on a daily basis (paragraph 11.5).

11.3 How does the RCSL system work?

The RCSL system, including notifications, is web-based and accessed through the HMRC website: www.hmrc.gov.uk. If you do not already use an HMRC online service, you will first need to register for the Government Gateway. Guidance on how to register is available at www.gateway.gov.uk.

The RCSL system is menu driven and provides help for each option. All aspects require completion electronically.

11.4 Submitting your RCSL

11.4.1 When must I submit my RCSL?

You will have to submit an RCSL for each of your VAT return periods; that is, if you submit:

  • monthly VAT returns you must submit monthly RCSLs; or
  • quarterly VAT returns you must submit quarterly RCSLs for the same stagger as your VAT returns; or
  • annual VAT returns you must submit an annual RCSL for the same 12 months as your VAT return; or
  • non-standard VAT return periods you must submit RCSLs for those same periods.

The due date for submission of RCSLs is the same as that of your VAT return.

11.4.2 What information must I submit?

For each customer to whom you have made reverse charge sales you must tell us:

  • the UK VAT registration number of the customer; and
  • for each calendar month in the period, the total net value of reverse charge sales to that customer.

This means, for example, that if you are to submit a quarterly RCSL for January, February and March you must tell us, for each customer, three values – one each for January, February and March. If you have made reverse charge sales to a customer for one or more months in the period but not every month you must record '0' value for the month(s) in which you made no reverse charge sales.

Customer VAT


number


January 2008


February 2008


March 2008


123456789


£10,000


£0


£30,000


You will only be able to make one such entry per customer per VAT period. This means that your data must be aggregated for each month and you will not be able to submit invoice or transaction level data.

You must also provide your contact name and telephone number.

11.4.3 How must I submit my RCSL

You may either enter the information directly on-line or you can upload a comma separated values (CSV) file. Your accounts software application may have the facility to export the CSV file from your system. Please contact your software vendor for further clarification. Details on the file specification are available on www.hmrc.gov.uk under ‘VAT’.

11.4.4 The customer VAT number

You must submit the customer’s UK nine-digit VAT registration number, i.e. without 'GB' suffix, branch identifier or TURN number. If, exceptionally, you do not have your customer’s VAT number at the time you submit your RCSL you should either:

  • enter a dummy VAT number, e.g. 111 1111 11 or 222 2222 22 and submit with value data and on receipt of the customer’s VAT number you should then amend the entry (this is HMRC’s preferred option); or
  • submit the RCSL excluding that customer and subsequently add the appropriate sales information once you have received the customer’s VAT number.

11.4.5 How do I calculate the value?

You must aggregate the values of all the reverse charge sales for the customer in the month, including any adjustments. You declare the whole pound amount only, and you may either round to the nearest pound or truncate the pence. If, after adjustments, the value is '0' you must still submit the information. Likewise, if the total net value is negative you must submit the information with a leading negative sign, e.g. - 100.

11.4.6 What if I make a mistake?

If you have submitted your RCSL and then find you have made a mistake you will need to give us the correct information by amending your original submission. If you have submitted your RCSL by completing the on-line list you will be able to add, delete or change lines on-line. If you submitted your RCSL by uploading a CSV file you must resubmit your complete list with the necessary additions, deletions or changes, i.e. including all the lines that were correct in the original submission.

Mistake


Action


Customer omitted


  • Add customer VAT number and the value of sales for each month in the period

Incorrect VAT number for customer


  • Change VAT number to correct VAT number

Incorrect value(s)


  • Change value(s) to correct value(s)

No RC sales made to customer in the period


  • Delete customer VAT number and values

Nil declaration made when RC sales made in period


  • Submit RCSL on-line or by uploading CSV file

11.4.7 What if HMRC discovers an inaccuracy?

Where HMRC discovers a material inaccuracy contained within a submitted RCSL you may be liable to a penalty of £100.

11.4.8 What if I do not make any reverse charge sales in the period?

If you do not make any reverse charge sales in a particular VAT period you must submit a nil declaration. You do this by selecting the 'nil declaration' option on the RCSL home page. There is no facility to submit a nil CSV file.

11.4.9 What if I fail to submit an RCSL?

If you fail to submit your RCSL you will be charged a penalty calculated on a daily basis - see paragraph 11.5.

11.4.10 Do I need to submit an RCSL if I make a supply of specified services?

You must not submit an RCSL for supplies of specified services. The RCSL is only for supplies made of specified goods.

11.4.11 What if I receive a supply of specified goods?

If you receive supplies of specified goods you must not complete and submit an RCSL. Only those who make supplies of specified goods must complete and submit an RCSL.

11.5 What if I fail to submit my RCSL?

If you fail to submit your RCSL you will be charged a penalty calculated on a daily basis, for a maximum of 100 days, which increases as each further default occurs, at the following rates:

  • 1st penalty £5.00,
  • 2nd penalty £10.00,
  • 3rd and subsequent penalties £15.00.

The £15.00 penalty continues to be applied until you have had four clear quarters.

Your rights and obligations

Your Charter explains what you can expect from us and what we can expect from you. For more information go to Your Charter.

Do you have any comments?

If you have any comments or suggestions to make about this notice please write to:

HM Revenue & Customs
VAT Fraud Team
Room 3/36
100 Parliament Street
London
SW1A 2BQ

Please note this address is not for general enquiries. For general enquires please phone our Helpline 0845 010 9000.

Putting things right

If you are not satisfied with our service, please let the person dealing with your affairs know what is wrong. We will work as quickly as possible to put things right and settle your complaint. If you are still unhappy, ask for your complaint to be referred to the Complaints Manager.

For more information about our complaints procedures go to hmrc.gov.uk and under quick links select Complaints.

How we use your information

HMRC is a Data Controller under the Data Protection Act 1998. We hold information for the purposes specified in our notification to the Information Commissioner, including the assessment and collection of tax and duties, the payment of benefits and the prevention and detection of crime, and may use this information for any of them.

We may get information about you from others, or we may give information to them. If we do, it will only be as the law permits to:

  • check the accuracy of information
  • prevent or detect crime
  • protect public funds.

We may check information we receive about you with what is already in our records. This can include information provided by you, as well as by others, such as other government departments or agencies and overseas tax and customs authorities. We will not give information to anyone outside HMRC unless the law permits us to do so. For more information go to hmrc.gov.uk and look for Data Protection Act within the Search facility.

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$START-DATA$ title=VAT reverse charge on specified goods and services^ summary=Explains the reverse charge on specified goods and services^ doctype=PublicNotice^ date=20-Feb-2014^ author=lk125388^ $END-DATA$
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