What is Reverse Charge VAT?

Not all businesses, freelancers and contractors are required to register for VAT. So it’s only natural that, once you exceed the threshold and need to register, you’ll have a lot of questions about how it works, and what you need to do.

You must register for VAT once your taxable turnover exceeds £85,000. You can read our full guide to registering for VAT.

In this post we’ll look at reverse charge VAT – an area that even seasoned business brains often find taxing!

If your turnover exceeds £85,000 you must register for VAT

What is Reverse Charge VAT?

If you buy certain products or services from outside the UK, the reverse charge is the amount of VAT you would have paid for that product or service had you bought it from the UK. You need to add any reverse charge VAT figures to the total amount you pay to HMRC each quarter.

You also have to account for reverse charges for any VAT you intend to reclaim each quarter. As a result, you neither have to pay HMRC anything extra, nor reclaim anything extra, for the products or services you acquire from outside the UK.If you’re not VAT registered, then you don’t have to worry about reverse charge VAT. Also, you don’t have to worry about reverse charging VAT if you only buy products or services from within the UK.

How Does Reverse Charge VAT Work? – An Example

When it comes to reverse charge VAT, it helps to think of yourself as both the supplier and the customer. You charge yourself the VAT for the product or service on your output tax, before claiming back the same amount as input tax. Invariably, the two amounts will be the same.

So let’s say you want to enter the Spanish market. As part of this, you pay a Spanish translator £1,000 to translate and localise your website and app.

Had you hired this translator in the UK, the cost would have been the standard VAT rate of 20%. So the amount of reverse charge you’d have to account for would be 20% of £1,000, or £200.

You’d have to add this £200 to the total VAT payments you make to HMRC that quarter. But you wouldn’t be out of pocket, as at exactly the same time, you’d reclaim this same amount.

You can learn more about reverse charge VAT on the government’s website. There’s also a detailed “technical guide” to the process of recording, paying, and claiming the reverse charge.

To Which Goods and Services Does Reverse Charge VAT Apply?

Building and construction is an area where you might have to take VAT reverse charges into account. But not all building and construction jobs are eligible for the reverse charge. For example, the reverse charge applies to painting and decorating, but not to interior design consultations. You can read a full guide to how VAT reverse charges apply to construction and building work.

There are further rules concerning VAT reverse charges for importing goods from outside the UK.

Further Guides to VAT

If you’re new to the world of business and taxation, VAT can make things very complicated very quickly. That’s why we have a number of guides covering various aspects of VAT, to help you get to grips with things.

  • When Should I Register for VAT?Guidance on eligibility, how to register, and how to make payments.
  • How Far Back Can I Claim VAT When Registering? A guide to completing your first VAT return. On what goods and services can you claim VAT expenses, and how far back can you go before registering?
  • Do You Pay VAT on Insurance? VAT doesn’t apply to all goods and services. Insurance is largely exempt, but there are some instances when you might have to pay VAT on insurance.
  • The Benefits of Registering for VAT as a Freelancer. You only have to register for VAT once your taxable turnover exceeds £85,000. If you’re a freelancer, this might seem like an astronomical sum. So you might think that you’ll never have to register for VAT. However, there are some benefits to registering for VAT, even if you don’t meet the criteria.

Beyond VAT: Other Things to Consider

If you want to enjoy long-term success in business, you need to safeguard yourself against any potential setbacks.

This is where insurance can make all the difference. Whether it’s a cash settlement for a personal injury, compensation for a customer who’s had their property damaged, or even legal protection in the face of a dispute, insurance can give you whatever cover you need to survive and thrive.

We offer insurance for contractors and freelancers from as little as 35p a day. There are no hidden fees, you can cancel at any time, and you can get an online quote and full cover in a matter of minutes. Get a free quote in minutes.

If you have any questions or would like to discuss your options please contact our Tapoly team at info@tapoly.com, call our help line on +44(0)2078460108 or try our chat on our website.