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HMRC internal manual

VAT Reverse Charge

The reverse charge: How the reverse charge works - an example

Example 1: From a VAT registered distributor to a retailer to an end consumer

A VAT registered UK distributor of mobile phones sells a number of mobile phones to a VAT registered UK retailer for a VAT-exclusive value of £6,000, an amount that is above the de minimis limit. The distributor does not charge VAT on the supply (£1,200), specifying on its invoice that the reverse charge applies.

The retailer will account for the distributor’s output tax (£1,200) but will also reclaim the amount as input tax, thus producing a nil net effect. The retailer now sells the mobile phones to members of the general public, charging VAT on the supply as normal.

Example 2: From a VAT registered distributor through a series of wholesalers to final despatch

A distributor sells a number of mobile phones to a wholesaler (WS1) for a VAT-exclusive value of £6,000, an amount that is above the de minimis limit. The distributor does not charge VAT on the supply (£1,200), specifying on its invoice that the reverse charge applies.

WS1 will account for the distributor’s output tax (£1,200) but will reclaim the tax as input tax, thus producing a nil net effect. WS1 now sells the mobile phones to another wholesaler (WS2) for a VAT-exclusive value of £7,000. WS1 does not charge VAT on the supply (£1,400), specifying on its invoice that the reverse charge applies.

WS2 will account for WS1’s output tax (£1,400) but will reclaim the tax as input tax, thus producing a nil net effect. WS2 now sells the mobile phones to a third wholesaler (WS3) for a VAT-exclusive value of £8,000. WS2 does not charge VAT on the supply (£1,600), specifying on its invoice that the reverse charge applies.

WS3 will account for WS2’s output tax (£1,600) but will reclaim the tax as input tax, thus producing a nil net effect. WS3 now sells the mobile phones to a taxable person registered for VAT in another Member State for a VAT-exclusive value of £9,000. WS3 does not charge VAT on the supply as this becomes zero-rated.

If we look at how this would translate onto the VAT returns we have:

  Distributor WS1 WS2 WS3
         
Reverse charge output tax* £0 £1,200 £1,400 £1,600
Input Tax* £0 £1,200 £1,400 £1,600
Net Tax £0 £0 £0 £0
Outputs £6,000 £7,000 £8,000 £9,000
Inputs £0 £6,000 £7,000 £8,000
  • The above assumes that the distributor made no purchases and WS 1-3 made no other purchases or supplies.