At Ellacotts we have many charity clients who purchase services from overseas suppliers such as Google/Facebook Ads or software downloads from US companies, and these all appear to be ‘VAT free’. However, these services are treated as ‘reverse charges’ for VAT purposes, and if the charity is dealing with partial exemption, the recovery of this VAT needs careful consideration as part of the partial exemption calculations.
A reverse charge ensures a UK customer is responsible for paying the VAT to HMRC on behalf of the non-UK supplier, therefore, the UK recipient acts as the supplier and purchaser of the service. This mechanism creates a level playing field and ensures there is no VAT disparity between buying services from the UK or overseas.
For a VAT registered charity, a reverse charge purchase would require boxes 1, 4, 6 and 7 to be completed on their VAT return. A fully taxable charity would be able to recover the input tax in full, however, those purchases which are used for the provision of exempt or non-business supplies would need to be restricted. Incorrect application of the reverse charge can result in an overclaim of input tax.
Non-VAT registered businesses, including charities, are also impacted by the reverse charge. The value of purchases from non-UK suppliers are recognised as ‘taxable turnover’ when calculating the requirement to VAT register. For example, a partially exempt charity has made supplies worth £180,000 in the last 12 months, of which £75,000 are taxable. During that period, they have also purchased overseas services totalling £16,000 which would result in exceeding the VAT threshold of £90,000.
We recommend charities have a system in place to record and monitor overseas purchases of services and ensure these are recorded correctly for those who are registered for VAT.
Don’t be caught out by these reverse charges as you could be liable for four years of incorrect returns under current legislation.
Can we help you with your VAT compliance?
If you would like more information or advice please contact our VAT Team at Ellacotts on 01295 250401 or email solutions@ellacotts.co.uk. You can also contact us here with your query and we will get back to you.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.