According to the HMRC VAT Cash Accounting Scheme Manual, 'The scheme shall not apply to...supplies of goods or services in respect of which it is for the recipient, on the supplier’s behalf, to account for and pay the VAT'. In other words, transactions subject to reverse charge VAT.
Therefore if you normally operate VAT using the cash accounting method, you need to account for transactions subject to the reverse charge VAT using the standard accounting method (i.e. accounting for VAT when invoiced, not necessarily when paid).
To enter the purchase:
Note: If you are not on cash accounting, do not follow the steps below, please instead refer to Services subject to reverse charge UK VAT.
If you are on the cash accounting scheme, you will already have selected Cash Accounting in the VAT set up dialog (Set Up>VAT). Leave this setting as Cash Accounting in order to account for VAT on your normal purchases that come under this scheme. For purchases subject to reverse charge VAT, you need to enter the transaction differently as follows:
1.Create a new Expense (or Cost of Sales if appropriate) account (Setup>Accounts>All>New) and name it something like 'Reverse charge services'.
 |
| Although it may seem counter-intuitive, do not tick the box that says ‘Entries analysed to this account are normally within the scope of VAT’ as you do not want this transaction to be accounted for under the cash accounting method. Instead, the purchase should be accounted for under the standard accounting method by entering the journal described in Step. 3. |
2.Enter the purchase using a PIN or PAY transaction, but with no VAT:
Total |
Net value of purchase |
Input VAT |
No VAT |
Net |
Net value of purchase |
| In the Analysis Account field, select the account you created in Step 1. If you need more analysis accounts, create them from new as described in Step 1, ensuring that they are set up as not being within the scope of VAT. |
| For example, for a purchase of £100 of services: |
 |
3.To account for the VAT, use the JRN transaction (or journal import function) to enter a journal to debit VAT - Input, and credit VAT - Output. You should use the same date used for the purchase transaction in Step 2.
| For example, reverse charge VAT due of £20.00 and input VAT reclaimable of £20.00 for a purchase of a net value of £100.00, would be entered as follows: |
 |
Screenshot of a journal entry to account for reverse charge VAT if on cash accounting
| You should make reference to 'reverse charge' in the Transaction details field, so that you can identify output VAT due under the reverse charge in the Backup report of the VAT return. You should also make to reference the associated purchase transaction number, or the supplier's invoice number in the Entry details field. |
Completing your VAT return
If you enter the journal as described in Step 3. above, the VAT return will automatically be populated with the required values in the appropriate boxes as follows:
VAT return element |
Included in VAT return |
Amount included (from example above) |
Entry from journal in Step 3. which populates VAT return |
Reverse charged output VAT |
Box 1 |
20.00 |
Line 2: Credit: VAT - Output |
Input VAT reclaimable |
Box 4 |
20.00 |
Line 1: Debit: VAT - Input |
Net value of deemed supply |
Box 6 |
100.00 |
Line 2: Net column |
Net value of purchase |
Box 7 |
100.00 |
Line 1: Net column |
