Reverse charge VAT on purchases from abroad

When you buy services from a supplier outside the UK — software subscriptions, advertising, consultancy, hosting — the supplier normally charges you no VAT. Instead, UK VAT rules make you account for the VAT yourself: you charge yourself UK VAT on the purchase and, in the same breath, reclaim it. This is the reverse charge. Sales Scribe handles both sides for you — you just pick the right tax rate.

Note: This guide covers the general reverse charge on services bought from overseas suppliers. Other self-accounting regimes — the domestic reverse charge for construction services, import VAT on goods and postponed VAT accounting — work differently and are not yet modelled.

Before you begin

• This applies to purchase orders, purchase invoices and purchase credit notes.
• Your organisation should be UK VAT-registered — if you are not registered, the reverse charge does not apply to you in Sales Scribe.
• The standard UK tax rates include Reverse Charge Expenses (20%) (scope: purchases). That is the rate to use.

How to record a reverse-charge purchase

1. Record the bill as usual — see Record a purchase invoice.
2. On each line for the overseas service, choose the Reverse Charge Expenses (20%) tax rate.
3. Check the totals: the Tax figure stays at zero for those lines, and the bill Total equals the net — exactly matching what the overseas supplier billed you.
4. Issue the bill.

Tip: Set the supplier's Default tax rate (purchases) to the reverse-charge rate on the supplier record (Add a supplier). New lines for that supplier then pre-select it, so you cannot forget.

What happens when you issue the bill

The money side is simple: you owe the supplier the net amount, and that is all that posts to accounts payable. No VAT is ever paid to the supplier.

The VAT side is self-accounted. Sales Scribe calculates the notional VAT (20% of the line net) and posts it to both sides of your VAT position at once:

• Output VAT is credited with the notional VAT — this is you charging yourself the VAT.
• Input VAT is debited with the same amount — this is you reclaiming it (subject to the usual rules; a line booked to a blocked account rides on the cost instead — see VAT on blocked expenses).

For a fully reclaimable purchase the two legs cancel, so the reverse charge is cash-neutral — but it must still appear on your VAT return, and Sales Scribe reports it correctly.

What it looks like on your VAT return

The VAT Summary report applies HMRC's rules for services from abroad:

• Box 1 — the notional VAT you charged yourself.
• Box 4 — the same VAT reclaimed (the reclaimable portion).
• Box 6 and Box 7 — the net value of the purchase appears in both the outputs and inputs totals.

The report's breakdowns also separate Reverse charge purchases from ordinary purchase invoices, with the self-accounted output and input VAT shown on their own rows.

Credit notes must match

If you later credit a reverse-charged bill, the credit-note line must use the same reverse-charge rate. This ensures both the money and the self-accounted VAT are unwound together. Sales Scribe enforces this when you issue the credit note — a credit against a reverse-charged bill line with the wrong rate is blocked with a message telling you which rate to use.

Important notes

• The supplier's invoice shows no VAT — that is correct. Do not add UK VAT with an ordinary rate, and do not gross the bill up. Record the net and pick the reverse-charge rate.
• The 20% is fixed on the rate, and is frozen onto each line at issue. It reflects the UK VAT rate that would apply if you had bought the service in the UK.
• The reverse-charge rate appears only on purchase documents. Sales documents never offer it.

Related guides

• Record a purchase invoice
• VAT on blocked expenses (entertainment and cars)
• VAT Summary report
• Add a supplier
• Create a purchase credit note