Reverse Charge Services and VAT registration

If you buy in services from outside the UK you may not be aware that these count as part of your taxable turnover (unless the supply of service is an exempt supply).

These services are subject to the VAT reverse charge mechanism. The VAT reverse charge means that if an international business supplies services to a UK business they do not charge UK VAT, instead the recipient of the services in the UK is liable to account for the VAT as both a sale and a purchase, the recipient is treated as if they made the supply themselves. This saves non-UK businesses from having to register for VAT in the UK.

As the business in the UK has to treat the supply as a sale it means that it impacts the taxable turnover and could even push non-VAT registered businesses above the VAT registration threshold (currently £85.000). See the below example:

A non-VAT registered UK business makes sales of £65,000 during a 12 month period which would be standard rated if they were VAT registered.

The same business buys in services from the US of £20,000 in the same 12 month period.

At first glance it appears the sales are below £85,000 therefore the business does not need to register for VAT BUT as the services they have received come under the VAT reverse charge the total taxable turnover would actually be £85,000, therefore the business must register for VAT.

If you buy in large amounts of services from outside the UK and are not VAT registered we would recommend a review to ensure you do not have a registration obligation.

If you would like our help with this or you have any queries please contact Yvonne Collings at [email protected] or you can call her on 01243 782 423.