This document discusses VAT invoicing and the reverse charge mechanism in the UK. It provides information on the contents required for a valid VAT invoice and the record keeping requirements. It also explains how the reverse charge works for imported services, where the UK customer accounts for the VAT on their VAT return rather than paying the foreign supplier. In some cases, the customer can prepare the supplier's invoice through a self-billing arrangement if an agreement is in place. The reverse charge ensures the equalization of VAT whether the supply is made by a UK or foreign supplier.

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Back to Basics
VAT Invoicing & the reverse charge
9 March 2016

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Your Speakers
Hugh Doherty
Manager
T +44 (0)207 728 2388
E hugh.doherty@uk.gt.com
Arsalan Aslam
Executive
T +44 (0)207 728 3285
E arsalan.a.aslam@uk.gt.com

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Agenda
1. The Importance of VAT Invoices
2. Contents of a VAT Invoice
3. Claiming Input VAT
4. VAT Records
5. Self-Billing
6. Reverse Charges

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The information given on invoices establishes:
• the VAT liability of the supplier of goods or services and
• the entitlement of the customer to a deduction for the VAT charged.
VAT registered businesses are obliged by law to issue these invoices.
Suppliers should ensure that invoices accurately represent the
transactions to which they refer.
• By neglecting to apply the correct VAT rate, the supplier could be
exposed to penalties.
• The business customer may misinterpret the supply due to the
misleading description and may also be exposed to penalties should
they fail to account at the correct rate on the purchase.
Importance of VAT Invoices

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VAT Invoices continued
When required?
Only VAT-registered businesses can issue VAT invoices and you must:
• issue and keep valid invoices - these can be paper or electronic
• keep copies of all the sales invoices you issue even if you cancel
them or produce one by mistake
• keep all purchase invoices for items you buy
Exceptions
You don’t need to issue a VAT invoice if:
• your invoice is only for exempt or zero-rated sales within the UK
• you're giving goods as a gift
• your customer operates a self-billing arrangement
• your customer is a non business customer (unless requested)

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Contents of a VAT Invoice
Full VAT invoices are used for most transactions. Here is what should be
included:
1. Unique invoice number that follows on from the last invoice
2. Your business name and address
3. Your VAT Registration number
4. Date invoice raised
5. The tax point (or 'time of supply') if this is different from the invoice date
6. Customer's name or trading name, and address
7. Description of the goods or services
8. Total amount excluding VAT
9. Total amount of VAT (in pounds sterling)
10. Price per item and quantity
11. Rate of any discount per item
12. Rate of VAT charged per item
13. Appropriate reference if using an applicable margin scheme
14. Appropriate reference is the invoice is subject to the reverse charge
(and where applicable customs EU VAT number)

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Claiming Input VAT
Normally input VAT credit will not be allowed without a correct invoice.
However, in exceptional circumstances alternative evidence can be
accepted, which could comprise of any of the following documents
(although anything that can support the claim can also be included):
• purchase order
• delivery notes
• records of payment
• records of the onward sales of the purchased items
• transport invoices/insurance
• supplier’s VAT number
Tribunal Decisions
 Croydon Hotel & Leisure Ltd – no VAT invoice issued
 JJ Newman – where invoices were destroyed
 Read and Smith – invoices were lost

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VAT Records
You should keep your VAT records for at least six years and must include:
• copies of all invoices you issue
• all invoices you receive (originals or electronic copies)
• self-billing agreements - this is where the customer prepares the invoice
• name, address and VAT number of any self-billing suppliers
• debit or credit notes
• import and export records
• records of items you can’t reclaim VAT on - e.g. business entertainment
• records of all the zero-rated, reduced or VAT exempt items you buy or
sell

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Self-billing – an overview
'Self-billing' is an arrangement between a supplier and a customer.
Both customer and supplier must be VAT registered. The customer
prepares the supplier’s invoice and forwards a copy to the supplier with
the payment.
If you want to put a self-billing arrangement in place you don’t have to
tell HMRC or get approval from them. But you do have to get your
supplier to agree to the arrangement prior to the invoice being raised.
You'll need to:
• enter into an agreement with each supplier
• review agreements with suppliers at regular intervals
• keep records of each of the suppliers who let you self-bill them
• make sure invoices contain the right information and are correctly
issued

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Self-billing agreements
The legally binding document must contain:
 the supplier’s agreement that the self-biller can issue invoices on the
supplier’s behalf
 the supplier’s confirmation that they won’t issue VAT invoices for goods
or services covered by the agreement
 an expiry date - usually for 12 months time but it could be the date that
any business contract you have with your supplier ends
 the supplier’s agreement that they’ll let the customer know if they stop
being registered for VAT, get a new VAT registration number or transfer
their business as a going concern
 details of any third party the self-billing process will be outsourced to
Where an agreement is not in place, self-billed invoices will not be valid
and therefore the customer cannot reclaim the input tax shown on them.

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The Reverse Charge
The reverse charge is when VAT is levied on most imported services by UK
VAT registered businesses. It's called the "reverse charge" because the
customer pays the VAT to HMRC, not the supplier.
Non-VAT registered businesses procuring reverse charge purchases are
included in determining whether they exceed the VAT registration threshold.
Scenario 1 - VAT on UK services
• UK supplier will charge UK VAT and declare the output tax to HMRC.
• UK VAT is charged on the supply of services, which the customer will
need to pay to the supplier.
• The VAT registered customer reclaims the VAT as input tax on their VAT
return.
So if the service is used to make taxable supplies, then the customer can
claim back all of the input tax. But if the customer is partially exempt – they
can only reclaim their recoverable % in the VAT return.

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The Reverse Charge
Scenario 2 - VAT on imported services
• Paid a solicitor in Switzerland £1,000 for legal advice.
• No obligation to pay the VAT due to the supplier - the 20% VAT
charge is paid by including it as output tax (Box 1) on the VAT return as
though £200 VAT was charged on £1,000 worth of sales.
• The reverse charge allows the VAT to be claimed as input tax on the
VAT return.
• All the £200 VAT can be reclaimed if the legal fees were purchased to
make taxable supplies.
• If not directly attributable, the purchase is included as 'residual' in the
partial exemption calculation
The VAT recovery is exactly the same in both scenarios, whether the
solicitor is based in the UK and charges UK VAT, or import the services
VAT free from an overseas supplier. The only difference is that instead of
paying VAT to a UK solicitor, the VAT gets paid to HMRC by including it as
output tax on the VAT return.

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The Reverse Charge - worked example
UK company makes a 20%
charge to itself in Box 1
UK customer recovers this
20% VAT as input tax in Box 4
UK customer will declare the
invoice amount in Box 7
VAT due in this period
on sales and other
outputs
Box 1 £200
VAT reclaimed in this
period on purchases
and other inputs
(including acquisitions
from the EC)
Box 4 £200
Total Value of sales
and all other outputs
excluding any VAT
Box 6 £1,000
Total Value of
purchases and all
other inputs excluding
any VAT
Box 7 £1,000
UK customer will declare the
same amount in Box 6

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The Reverse Charge continued
The reverse charge applies to services where:
i. The services fall within the general place of supply rule
ii. the supplier belongs outside the UK
iii. the recipient is a 'relevant business person' who belongs in the UK
iv. the supply is not exempt from UK VAT
Which entity is making/receiving the
supply?
The UK position is that the establishment
making the supply is the one most closely
connected to it. Therefore, minimal
involvement in making the supply will not be
viewed as ‘intervening’.

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Example 1 – Grant Thornton France
France
UK
Domestic UK VAT
UKUK
Branch Customer
OR
Head Office
?
?
?
?
??

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Example 2 – Grant Thornton France
France
UK
UKUK
Subsidiary Customer
Parent

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The Reverse Charge Mechanism
UK Company UK Company
UK company
makes a charge
of 20% on its
invoice
UK customer
recovers this
20% VAT as
input tax
The net VAT effect
of this transaction is
nil
FR Company UK Company
French company does not charge
FR VAT on its invoice, instead
quoting its customer's VAT number
UK customer will self-account for
VAT under the reverse charge:
- 20% output tax
- 20% input tax
This is as if the supply had
been made in the UK
The net VAT effect
of this transaction is
nil. However, there
is a cash flow
benefit as the UK
customer will not
need to pay any
VAT and claim it
back. Instead, it
self-accounts for
both output and
input tax which has
a nil effect
There is no advantage to being in a 'low-tax'
regime as, for VAT purposes, the cross-
border regime allows for the equalisation of
VAT.

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