VAT Reverse Charge for International Services

If a UK business procures services from suppliers that are established overseas, usually VAT would not be charged by the overseas supplier. However, if the service is one that would attract VAT in the UK, the UK business is required to declare VAT at the relevant UK rate on the value of the supply as though it were the supplier. This principle is known as the “reverse charge”.

If the cost will solely support the VATable activity of the UK business, the business will be able to recover the VAT declared on a “reverse charge” basis.  In such a scenario, the VAT in question will not represent a cost and the application of the reverse charge will simply be a paper transaction.  However, if the UK business will use the cost to support a VAT-exempt or non-business activity, it will only be able to claim a proportion (if any) of the reverse charge VAT, which will therefore represent a cost.

A quirk of the reverse charge legislation means that UK businesses not registered for VAT will also need to consider the level of services acquired from businesses established overseas.  This is because the value of such services is added to the UK VATable turnover of the business for the purposes of determining whether that business is required to register for VAT. 

Businesses in financial services, insurance and healthcare are often exempt from these additional VAT obligations as they usually generate income that is exempt from VAT (and so they will often not be required to register for VAT).  If such businesses buy in services from overseas and the relevant expenditure is greater than the VAT-registration threshold (currently £90,000) in a rolling 12-month period, they are required to register for VAT for the purposes of declaring UK VAT on the value of the relevant services.

We regularly advise UK businesses on the application of the reverse charge to services procured from overseas suppliers. Therefore, if this is an issue that affects your business, please get in touch by calling 0161 477 6600 or emailing us at enquiries@thevatpeople.com.