When you purchase from an EU supplier, the ‘reverse charge’ mechanism means you won’t be charged the local rate of VAT as long as two key conditions are met:
- You must provide the EU supplier with your VAT number (as this only applies to VAT registered companies)
- The supplier must include the following EU directive paragraph on their invoice - ‘EU VAT Directive: Application of the reverse charge mechanism according to articles 44 and 196 of Council Directive 2006/112/EC of 28 November 2006’.
There’s more information about the reverse charge mechanism here
If your purchase qualifies, then you’re ready to account for your transaction. For Xero users, this means choosing the ‘Zero rated EC services’ tax code to make sure you’re not charged VAT on this purchase when your next VAT return is submitted.
If the correct type of invoice isn’t available, or the value is too low to warrant obtaining the relevant invoice (e.g. some web subscription services) then don’t worry. In these circumstances, you can just record the whole amount as ‘Zero-rated’ and the overseas VAT is included within this.
If you sell or buy goods or services outside of the EU (ie to the rest of the world) this is recorded as ‘No VAT’ and no further disclosures are required, provided the goods have left the EU or it’s a service where the place of supply is outside the EU.
Download our ‘VAT rules flowchart’ PDF below to work out where your place of supply is.
If you need help recording an EU purchase, give us a call on 01454 300 999, or drop an email to info@fd-works.co.uk
Find out more about the FD Works’ approach to finance at fd-works.co.uk