I was about to submit a VAT Return for the Mar-May quarter. This included, for the first time, a supply of licences from a company in The Netherlands, priced in euros. Box 4 on my VAT Return is £51.92 and Box 7 is £248. QuickFile correctly accounted for the Reverse Charge VAT at 21% (the VAT rate in The Netherlands). However, when I attempted to submit this VAT Return, a red message popped up that said:
WARNING: Based on the current rate of VAT, the amount you have entered in Box 4 exceeds the amount HM Revenue & Customs would have expected you to declare in comparison to the value you have entered in Box 7. This could be correct if you are making an adjustment to a previous return, or have understated the value in Box 7. If you want to amend your return please click the ‘Back’ button below and change the amounts you have entered, alternatively please click the ‘Submit’ button to proceed.
I assume this warning appeared as £51.92 is more then 20% of £248, which occurred because most of the £248 was taxed at 21% rather than 20%. Can I ignore the warning?
Having thought about this a bit more, I am sure that QuickFile and I are correct. So, I ignored the warning and submitted my VAT Return.
I have noticed that HMRC doesn’t really consider foreign currency transaction in their guidance. I guess they assume that companies trading in other currencies use qualified accountants to prepare VAT Returns and Annual Accounts. However, that’s no longer the case nowadays.
I don’t think that is correct actually - with both reverse charge purchases (of services) and EC acquisitions (of goods) you account for the VAT using the appropriate UK rate as if you were both the supplier and the purchaser.
If you’re buying goods from the Netherlands then you would enter the amount they charged you (which will have been zero rated by them) as the NET, set the VAT rate to the appropriate rate for that item had it been sold by a UK supplier (usually 20% but might be 0% if it’s food or 5% if it’s tampons, for example), and tick the “apply reverse charge” box. This will put the net in box 9 and the UK VAT in box 2, as well as the usual claiming it back in boxes 7 and 3, which nets off to zero.
If you’re buying services from the Netherlands then you can do the same thing but you also need to apply a manual adjustment to your VAT return to move some figures around, because the true “reverse charge” procedure for services requires the VAT in box 1 (not 2, that’s only for goods) and the net in box 6 (not 9). This adjustment doesn’t change the amount of VAT you owe, which again will be zero as you’re declaring the same for this transaction in box 1 as you’re reclaiming in box 3 - it just changes the box in which it is reported. Remember that the amounts you need to move will be the £ Sterling equivalents given for these purchases in “download calculations” on the VAT return page, rather than the original € amounts.
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The 21% VAT rate on the purchase record was defaulted by QuickFile and I didn’t change it. As you say, the net VAT payment is the same because the amount is treated as both input and output VAT.
I’ll report back if HMRC query this. We also have sales outside the EC VAT area.
It should only do that if the default VAT rate was set when the supplier was created. We’ll have to wait until someone from QuickFile staff can take a look from their end (I don’t work for QuickFile, I’m just a keen user).
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It should be only UK VAT rate