Reverse Charge VAT can seem like quite a complex thing to understand…which is why we’ve produced a guide to help business owners navigate it correctly.
Here’s what you need to know:
What is Reverse Charge VAT?
The VAT reverse charge on services is a mechanism used to simplify the VAT reporting process in cross-border transactions within the European Union. Under this system, the responsibility for reporting VAT shifts from the supplier to the customer.
When a business in one EU country provides services to a business in another country, the supplier does not charge VAT on the invoice. Instead, the customer receiving the service must account for both the input and output VAT on their VAT return. This approach eliminates the need for the supplier to register for VAT in the customer’s country and ensures that VAT is correctly accounted for and paid in the country where the service is consumed. The reverse charge mechanism helps streamline tax administration and reduces the opportunities for tax evasion.
Reverse charges and Google Ads
One of the most common instances that businesses will need to be aware of reverse charges is when they purchase advertising services from companies such as Google. As Google is headquartered and VAT registered in Dublin, which is outside of UK’s tax jurisdiction, UK companies purchasing services will be subject to reverse charge for VAT.
Including reverse charges in taxable turnover
Businesses need to be aware that services received from non-UK VAT registered companies and fall under the reverse charge mechanism must be included in their ongoing turnover calculations. This can get a little complicated if a company is on the verge of the threshold for becoming VAT registered, which is currently £90k turnover in a rolling 12 month period from 1st April 2024.
For instance, if a company with an annual taxable turnover of £80k spent £15k on advertising services from Google in May 2024 their annual taxable turnover would increase to £95k which is over the threshold, and they would be liable to register for VAT from 1st July 2024 due to the 30 days grace period from HMRC. The reverse charge for the services received from Google would not be charged on the supply this time round as the company was under the threshold, however going forward any further services provided by Google or other non-UK VAT registered companies would have to be accounted for by the UK business under the reverse charge mechanism.
But what if my company is fully exempt from VAT?
Whilst some companies are fully exempt from registering for VAT, they will still need to be aware that spending on services under the reverse charge such as marketing and advertising ie Google Ads counts as taxable turnover and could take them over the £90k threshold for VAT. In cases such as this, companies would have to account for reverse charges incurred and speak to their accountants for possible VAT registration even though their supplies are VAT exempt.
How we can help
Grappling with the complexities of VAT can be confusing, but you don’t have to deal with it alone!
The Nordens team of chartered accountants and advisors is here to help you understand the tax rules and ensure your business doesn’t get caught out.
If you need assistance with VAT or any other accounting services, look no further than Nordens Chartered Accountants. Contact us today at 0208 530 0720 or fill out our contact form to schedule a consultation.
