Reverse charge VAT for EC services when partially exempt

Hi Bernice Cole,

I'm here to walk you through the steps in recording the VAT from the funder.

First, you can add a service item to account for the 20% VAT. Then, add it as a line item on the expense transaction. Here's how:

1. From the + New tab, select either Bill or Expense.
2. Select the name of the funder or add them as your Payee.
3. Select the service item you created earlier.
4. Enter the AMOUNT.
5. Select a VAT category.
6. Click Save and close.

You can also visit this page or more on the reverse charge procedure:  GOV.UK.

I'd appreciate if you can update me on how it goes. I'm always here to help.

Thanks Adrian but this doesn't do what I need it to. 

The link you sent is for domestic reverse charge VAT which is not what I'm talking about. 

The original bill is from a Dutch supplier and doesn't have VAT payable on it BUT reverse charge VAT does apply. I've spoken with an accountant and they have confirmed I need to

1) add 20% of the bill amount to box 1 of the VAT report to pay to HMRC. The supplier doesn't get anything. 

2) As we can claim the above back from the funder (not the same organisation as the Dutch supplier), I also need this to be recorded as an expense. 

I can set up a journal but can only post to VAT control, not box 1. This is what I need to do on QB. 

Can you let me know how I can do this. 

Thank you! 

Hi @Bernice Cole  

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@Bernice Cole  wrote:

I've spoken with an accountant and they have confirmed I need to.

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Personally, I think this is wrong but "ours is not to reason why"!

If you use RCSG20% VAT code on the line item it's going to add/subtract the VAT & leave you with £nil to pay to HMRC.  QBO VAT codes are not intended for partial use - so you have to work around what you have.

Since you seem to insist on paying the VAT, you will need to use VAT code S=20% on that line.

Your bill value is now 20% too high - so you need to enter a negative line to compensate (use VAT code NoVAT to keep it off the VAT100).  Post this line to your funder's account.

Supplier gets the correct payment.

HMRC gets 20%.

Funder covers the 20%.

This is doing the same job as a journal moving the expense from VAT Control to Funder's account.

Hope this helps.

Thank you Paul. 

I spoke to a VAT expert about this so they do know what they're doing!

We have grant funding which is exempt from VAT claims and the reverse charges relate to expenses paid by grant funding so we can't claim it back from HMRC as per "normal" reverse charge items. I would love not to pay the VAT but I've been advised we must.

Can you explain more what you mean by "so you need to enter a negative line to compensate (use VAT code NoVAT to keep it off the VAT100).  Post this line to your funder's account." 

Is this a negative line on the same bill? What nominal code do I put it against as I want it to show up as an expense in our accounts against the same nominal as the original bill? Also, we don't invoice our funder via Quickbooks - we have to manually submit a quarterly drawdown report based on our expenses that quarter. 

Essentially this is what would happen if the supplier had charged regular VAT in the first place. HMRC would get their cut, our expense line would go up by 20% (as the whole amount is recorded as exempt from VAT) and we'd claim the full amount back from our funder. This is what I need to replicate here. 

Thanks

Bernice 

 Hello Bernice Cole, so what Paul is referring to is a 100% vat transaction if you have a look at this article it shows you the steps that need to be done.

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 @Bernice Cole wrote:

 

Essentially this is what would happen if the supplier had charged regular VAT in the first place. HMRC would get their cut, our expense line would go up by 20% (as the whole amount is recorded as exempt from VAT) and we'd claim the full amount back from our funder. This is what I need to replicate here. 

 

Thanks

Bernice 

 

 

 

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Yes - that's what I was going for but wasn't aware you wouldn't generally reclaim any VAT on UK supplies.

In that case - ignore the post, it's completely the wrong way round!

In order to pay HMRC VAT on a purchase (usually you're reclaiming as an input) the VAT shown on the QBO Bill would need to be negative.  I'm not sure that QBO will allow that.

But, maybe try this...

It looks a little convoluted but I think it does what you're asking for.

Lines 1 & 2 create the negative VAT (to pay HMRC via VAT100).

Line 3 is what you'd usually enter for a UK supplier.

The balance to pay the supplier is £100 (rather than £120).

HMRC receives £20 - although it's by reducing box 4 rather than increasing box 1.

The overall effect on the expense account is £120 (as it would be with a UK supplier) which is reclaimed from the funder.

Hope this helps.

Thanks Ashleigh - but this alters box 4 on the VAT return which I have been told I shouldn't do. I need to alter box 1. 

Thanks Paul - this does look very convoluted and I have multiple transactions I need to adjust in this way so I'm not sure of the practicalities of this. The tax expert has suggested a journal would be an appropriate way to account for this in QB. Is there no way of doing this in QB? 

Alternatively, I have found this which would seem to do what I need as it both adjusts box 1 and creates and expense that I can charge back to the funder: https://quickbooks.intuit.com/learn-support/en-uk/help-article/report-management/create-delete-vat-a...

My only question is the amount I put in the adjustment, the full adjusted amount (so the original amount plus the vat needed to be recharged) OR just the recharged VAT amount. 

Thanks! 

Bernice 

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@Bernice Cole  wrote:

Thanks Paul - this does look very convoluted and I have multiple transactions I need to adjust in this way so I'm not sure of the practicalities of this. The tax expert has suggested a journal would be an appropriate way to account for this in QB. Is there no way of doing this in QB? 

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I don't think there is going to be an un-convoluted way unfortunately.

Certainly no simple way of feeding into Box 1 from a Purchase (Input).  What you're trying to do is very niche.  

I don't even think you can create a Custom VAT Code that will allow it because it's 180° away from the norm & possibly something the programmers will have tried to make impossible (if they thought of it at all!).

A journal is probably going to be your only method.  Your tax expert really should be giving you better guidance - rather than vague commandments 

The VAT100 adjustment - I don't know about.  I can't see that posting to the same nominal code without further tweaking it.

OK, one last shot!

The difficulty is that RCSG is not a single VAT code in QBO - it's a Grouped Code but the underlying codes (RCSGP & RCPSG) are hidden from the user (but are shown on the VAT100 if you look carefully).  You have to cobble a few together to get the result.

Line 1 will add the VAT to boxes 1 & 4 - standard RCSG transaction.

You then need to remove the VAT from box 4 - line 2 should do just that.

Check this on the VAT100 - I haven't checked as I only have live QBO accounts.

Now you need to add the whole cost into the expense account - line 3 - as you would enter a UK invoice.

The balance to pay the supplier is £100 (as it should be).

HMRC receives £20 - via box 1 (if it works).

The overall effect on the expense account is £120 (as it would be with a UK supplier) which is reclaimed from the funder.

I think, to do the same with a journal, you would have to do something similar.  A journal must balance (nett £zero) so you don't have any more freedom to manoeuvre.

Hope this helps.