The reverse charge mechanism impacts many FreeAgent customers who buy services from EU countries other than the UK. As of March 2014, FreeAgent calculates the reverse charge and automatically adds it to your VAT return.
What is the reverse charge?
If you buy services (not goods) from countries other than the UK, and you belong in the UK, then you may have to use the reverse charge mechanism to account for VAT.
Services that you sell abroad don't come into this equation, because the service is outside the scope of UK VAT if your customer is a business. If your customer is an end consumer, you would account for VAT on the sale of that service either using UK VAT rates, or, in some cases, VAT rates local to the customer.
How FreeAgent handles the reverse charge
Here is what FreeAgent will do for you automatically when you are buying services in from the wider EU, so long as you have posted these costs into FreeAgent correctly, whether you bought these services as bills, expenses, or bank payments. Remember to set the VAT rate as 0% when you enter these costs. Let's say the service cost £100:
- FreeAgent will work out the VAT you would have paid on that service if you'd bought it from a VAT-registered supplier in the UK. In this case that would be £100 x 20% = £20.
- That amount (in this case £20) will be added to box 1 on your VAT return.
- It will also be added to box 4 on your VAT return, assuming you're entitled to claim this VAT back.
- The net amount (in this case £100) will be added to both boxes 6 and 7 of your VAT return.
The reverse charge is accounted for in the same way regardless of whether you are using the VAT flat rate scheme.