If a trader on the flat rate scheme for VAT purchases services from outside the UK, the business needs to account for Flat Rate Scheme Reverse Charge VAT according to Directive 2006/112/EC. Small businesses on the Flat Rate Scheme for VAT do not usually account for VAT on purchases. If you buy goods or services from outside the UK, you need gross up the amount invoiced where UK VAT has not been charged. A corresponding amount is recorded in your sales figures. Details of how to account for flat rate scheme reverse charge VAT are given below.
When you buy services from suppliers in other countries, you may have to account for the VAT yourself. This is called the reverse charge and is also known as ‘tax shift’. Where it applies, you act as if you’re both the supplier and the customer. You charge yourself the VAT and then (assuming that the service relates to VAT taxable supplies that you make) you also claim it back. The 2 taxes cancel each other out as long as you make taxable supplies. If your sales are exempt from VAT, you won’t be able to reclaim the VAT on the purchases so you will be out of pocket.
HMRC notice 733 paragraph 6.4 confirms that supplies of services outside the UK are outside the scope of VAT. These sales should be left out of your flat rate turnover. Purchases of services should be dealt with outside of the Flat Rate Scheme. Exclude them from your flat rate turnover but record the VAT in boxes 1 and 4 of your VAT return in common with standard VAT accounting. You will also need to include the net value of the services (before VAT) in box 6 &7.
Under the Flat Rate Scheme there are special rules for completing boxes 1, 4, 6 and 7 of the VAT return. These are shown below.
To calculate the VAT due under the Flat Rate Scheme, you must apply the flat rate percentage for your trade sector to the total of all your supplies, including VAT. This includes your supplies at the standard and reduced rates and any which are zero rated or exempt. You may have other output tax to include in the box such as the sale of capital expenditure goods on which you have claimed input tax separately while using the Flat Rate Scheme.
You should also use this box to record transactions that are subject to the reverse charge (see paragraph 4.6).
If you use the Flat Rate Scheme you do not normally make a separate claim for input VAT, including any VAT on imports or acquisitions, as the flat rate percentage for your trade sector includes an allowance for input VAT.
However, you can recover VAT on any single purchase of capital goods of £2,000 or more, including VAT, and VAT on stocks and assets on hand at registration. For details, see VAT Notice 733: Flat Rate Scheme for small businesses.
You should also use this box to claim Bad Debt Relief and to account for reverse charge transactions (see paragraph 4.6).
Enter the gross flat rate turnover (including VAT). You should also include the value excluding VAT of any supplies accounted for outside the Flat Rate Scheme. This includes the sale of any capital goods on which you have reclaimed input VAT, and reverse charge transactions. Also include any amount you have entered in box 8.
Usually there will be no figure in this box unless you have bought a capital good costing more than £2,000 (including VAT) and you are claiming the input VAT in box 4. If you have made a capital purchase over £2,000, enter the purchase price excluding VAT. Also include in box 7 any amount you have entered in box 9 and reverse charge transactions.
HMRC will only speak to you or an appointed agent about your accounts. Agents can get through to HMRC more quickly on dedicated helplines. We can save you time and money in dealing with the long waiting times kept on hold. If you would like to appoint an accountant as your agent please contact Alterledger using the form below.
Most businesses are likely to be better avoiding the Flat Rate Scheme. This is especially the case for the service sector. This is due to the changes brought about by the limited cost trader rules. Click here to view the article explaining why you should reconsider if you are on the Flat Rate Scheme for VAT.
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The situation with VAT has changed since Brexit. Click here to see the article covering VAT on services from outside the UK.
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