Since Brexit, one of the most common queries I get is about what VAT codes to use for services from outside the UK. Think about things like Microsoft, Zoom and Dropbox ...
VAT on software services from outside the UK will be handled differently!
Even if you don't consider your company to be one that imports goods or services you will often find you do use one of these software suppliers and you need to deal with them correctly in your accounts software.
"The rules apply for business to business transactions not if you are an individual!"
You will often need to prove you are a business to the supplier, either with your VAT number or company registration as each company is different. Once you have this sorted, rather than charging you the VAT rate from the country they are based in, they can use the reverse charge method, and this should be stated on their invoice to you.
In your accounts, this means that you, the customer receiving the service and based in the UK, will act as the supplier and the recipient of the service on your VAT return. This applies if your actual supplier belongs outside of the UK, even if they have a UK VAT registration number. So, always look at the paperwork from the company so you know if this method applies.
So, how does this work in a practical way? Your accounts software will have a VAT code you can use when you input the invoice. This is called Reverse Charge. In Sage50c software, it is code T24 unless you don't use standard codes in your software.
In Xero, you may need to set up a tax type called Reverse Charges to use. The effect of this tax code is to add the Tax amount to boxes 1 and 4, and add the full value of the supply to boxes 6 and 7. I know it sounds weird, but that is what required by the HMRC.
This only applies if the supplier is outside of the UK, and the customer (you) is inside the UK, and under the place of supply rules, the services are supplied outside the scope of UK VAT. This also only applies to taxable supplies and not exempt supplies!
If it does not mention a reverse charge on the invoice this implies that the supply should be treated as normal within the UK taxable supply. If VAT at 20% is mentioned then just use your regular 20% tax code.
Confused? You may well be! If you need to go through this or check what this means to the suppliers you use, arrange a hand-holding session so I can help you make sure you are using the correct tax codes.
Until next time ...
ALISON MEAD
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more, it may be a great idea to give me a call on 01604 217365 and let's see how I can help you.
Alison loves bookkeeping and supporting bookkeepers. She has been helping clients to be better bookkeepers in Sage 50 for over 24 years and has been Xero Accredited in accounts and payroll for a number of years too.
She specialises in a very unique hand-holding method of training, helping bookkeepers and business owners to use their accounts software as and when they need support in setting up and producing their invoices, reports and financial information.
Alison combines her role at Silicon Bullet with her Forever Living network marketing businesses and is often to be seen at business networking meetings as she likes to keep busy.
You know what they say: if you want something done well ask a busy person!
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