VAT Reverse Charge on purchases

The VAT reverse charge typically applies where B2B services are purchased from a supplier that is located outside the UK, for example this might be software costs from companies such as Microsoft, Google, Facebook etc. In the cases where the relevant criteria is met, VAT is not charged on the invoice from the supplier and there is no VAT to be reclaimed in the UK.

Under the reporting rules, a notional figure for the VAT on reverse charge purchases must be entered on the VAT return under both 'sales' and 'purchases', but as there is no VAT to reclaim these figures will net off to nil. This is why you might see "VAT on sales" on your VAT return, with an equal and opposite figure within "VAT reclaimed on purchases".

In the example below, the company has not made any VATable sales and made purchases from outside the UK of £3,378, the notional VAT on which was £676 (calculated at 20% of £3,378). Under the reverse charge reporting rules, the VAT of £676 is shown in box 1 (sales) and is also within box 4 (purchases) - which when combined net off to zero.

Box 6 shows sales of £3,378 which relate to the reverse charge, even though the company did not make many sales during that period.

In order to check that the VAT reverse charge is working correctly for you, check that the supplier has your business details including your VAT number. You can normally enter this in the settings on the platform - see below for an example.

If these details are not entered, the supplier may assume this is a B2C transactions, as opposed to B2B, and they may charge VAT on your invoice as a result. You will know that the reverse charge is working properly for you when supplier invoices from outside of the UK do not contain VAT, and those transactions have been marked as 'reverse charge' in Xero and on your VAT return.