VATREVCHG21000 - 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 拢6,000, an amount that is above the de minimis limit. The distributor does not charge VAT on the supply (拢1,200), specifying on its invoice that the reverse charge applies.
The retailer will account for the distributor鈥檚 output tax (拢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 export
A distributor sells a number of mobile phones to a wholesaler (WS1) for a VAT-exclusive value of 拢6,000, an amount that is above the de minimis limit. The distributor does not charge VAT on the supply (拢1,200), specifying on its invoice that the reverse charge applies.
WS1 will account for the distributor鈥檚 output tax (拢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 拢7,000. WS1 does not charge VAT on the supply (拢1,400), specifying on its invoice that the reverse charge applies.
WS2 will account for WS1鈥檚 output tax (拢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 拢8,000. WS2 does not charge VAT on the supply (拢1,600), specifying on its invoice that the reverse charge applies.
WS3 will account for WS2鈥檚 output tax (拢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 outside the UK for a VAT-exclusive value of 拢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* | 拢0 | 拢1,200 | 拢1,400 | 拢1,600 |
| Input Tax* | 拢0 | 拢1,200 | 拢1,400 | 拢1,600 |
| Net Tax | 拢0 | 拢0 | 拢0 | 拢0 |
| Outputs | 拢6,000 | 拢7,000 | 拢8,000 | 拢9,000 |
| Inputs | 拢0 | 拢6,000 | 拢7,000 | 拢8,000 |
* The above assumes that the distributor made no purchases and WS 1-3 made no other purchases or supplies.