Revenue and Customs Brief 24/07
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Issued 20 March 2007
VAT – Proposed reverse charge accounting for businesses trading in mobile
telephones and computer chips: announcement of targeted implementation and
details of how the rules will operate in practice; and exposure of draft
legislation for comment
Who needs to read this?
Businesses buying and/or selling any of the following goods:
- Mobile telephones; and
- Integrated circuit devices, such as microprocessors and central processing
units, in a state prior to integration into end user products.
Business Briefs 10/06 and 14/06 gave notice of the Government’s intention to
implement reverse charge accounting arrangements for certain goods (“the reverse
charge”), subject to an EU derogation. Business Brief 19/06 gave a commitment to
provide UK business with about 8 weeks notice of the implementation of the
On 19 March 2007 the Government announced the implementation of the
reverse charge for mobile phones and computer chips with effect from 1 June 2007.
The reverse charge will not apply to the other goods mentioned
in the earlier business Briefs.
The purpose of this Business Brief is to:
i) confirmation of the timing of the introduction of the reverse charge, and
of the goods to which it will apply;
ii) guidance on the application of reverse charge accounting to mobile phone
iii) guidance, to both retailers and wholesalers, on the operation of the de
iv) clarification of the proposed anti-disaggregation provisions;
v) guidance to certain customers, such as charities and Local Authorities,
purchasing goods for business and non-business purposes;
vi) guidance on the impact of reverse charge accounting on Payments on
vii) outline details of Reverse Charge Sales Lists, including notifying HMRC
when the first supplies under the reverse charge are made;
viii) other details of how the new rules will operate in practice (completion
of the VAT return; invoicing; the impact on the Cash Accounting Scheme, the Flat
Rate Scheme and the second-hand margin scheme; and ‘light touch’ on penalties);
B) expose the draft secondary legislation for urgent comment before it is
laid in May 2007. Comments are invited by no later than 11 April 2007.
A i) Timing and scope of implementation
Following negotiations with our European partners, the Government has decided
to target the reverse charge accounting mechanism on mobile phones and computer
chips only (detailed in categories 1 and 2 above) with effect from 1 June 2007.
Reverse charge accounting will therefore not apply to electronic storage media
used in connection with computers, mobile phones or certain other electronic
devices, and electronic devices used for the storage, processing or recording of
electronic data (categories 3 and 4 in Business Brief 14/06). Communication
devices such as Blackberrys fall within the definition of a mobile phone and
therefore will come within the scope of the reverse charge.
ii) Application of reverse charge accounting to mobile phone contracts
Mobile phones which are supplied with an airtime contract are excluded from
the scope of reverse charge accounting. This includes replacement phones and
upgrades supplied under the terms of an airtime contract.
However, reverse charge accounting will apply to “Pay as You
Go” (“Prepay”) phones.
iii) Operation of the de minimis limit
Business Brief 10/06 advised that the reverse charge would only apply to
supplies of the specified goods with a VAT-exclusive value of £1000 or more,
when made within the UK to a VAT-registered business and are to be used for
business purposes. The Government has decided to raise this limit to
£5000, which will apply to the total value of goods subject to the
reverse charge supplied together and detailed on a single invoice. Normal VAT
accounting continues to apply to supplies of these goods below that value.
Retailers, including internet retailers
The de minimis limit is intended to relieve retailers of the need to carry
out the necessary checks to establish whether a customer is VAT-registered and
is purchasing the goods for a business purpose. Raising the de minimis limit to
£5000 should reduce the number of sales made by retailers to other businesses
where reverse charge accounting could apply.
Nevertheless, we recognise that there will still be a limited number of cases
where the value of a sale at the retail stage exceeds this de minimis threshold,
and that in a retail environment it may be difficult to carry out the necessary
checks. If, for a transaction over £5000 in value, a retailer is unable to carry
out these checks to his satisfaction, then VAT should be charged in the normal
way. Such a situation may also arise with internet sales from retail sites,
which should be treated in the same way. However, retailers and internet
suppliers already have their own checks, usually based on the value (for
example, above £10,000) or quantity of the goods, to prevent fraud or money
laundering. We would expect them to apply similar checks to prevent manipulation
of the £5000 limit.
Wholesalers and other suppliers
Circumstances in other trading environments, such as the wholesale market,
are different because suppliers normally have a more established relationship
with their customers, which means that they are in a better position to carry
out checks on their bona fides, including for the purpose of applying the
HMRC is often asked what additional checks businesses should make in order to
demonstrate that they have taken reasonable steps to establish whether the
reverse charge applies. It is very difficult to be specific because industries
and relationships vary widely.
We are aware that legitimate businesses carry out several commercial checks
on their suppliers and customers covering various risks, such as to ensure
acceptable use of the goods by the customer. In most instances, these checks
will be adequate for reverse charge purposes, provided they are properly
evidenced, unless the supplier has doubts about the reliability of the customer.
Businesses selling goods under the reverse charge procedure need to obtain
the VAT registration numbers of affected customers, as they will be required for
the Reverse Charge Sales Lists. In general, there will be no need to verify VAT
registration numbers of customers with an established trading relationship,
unless there are specific doubts, but it may be prudent to verify the VAT
registration number of new customers.
Where businesses trade with customers without satisfying themselves as to
their bona fides, they may be liable to pay to HMRC any tax lost as a result.
iv) Anti-disaggregation provisions
In earlier consultation on the operation of the reverse charge, anti-disaggregation
provisions had been suggested to prevent the possibility of manipulation of the
de minimis limit, below which the reverse charge will not apply. However, the
consultation process identified that businesses would have practical
difficulties in implementing such provisions. In the light of these concerns,
the Government has decided not to introduce anti-disaggregation provisions in
relation to reverse charge accounting. However, any attempt to manipulate the de
minimis limit of £5000 will be vigorously challenged.
v) Charities and Local Authorities
Some customers, such as charities and Local Authorities, may purchase goods
to which the reverse charge applies which will be used partly for business and
partly for non-business purposes. In such cases, the reverse charge applies: the
customer should account for output tax under the reverse charge procedure and
apply the appropriate restriction to the deduction of the resulting input VAT.
vi) Payments on Account
The Payments on Account (POA) scheme requires businesses with a net VAT
liability of £2 million per year or more to make monthly payments on account.
Under the current POA rules, the introduction of the reverse charge would have
the effect of bringing some businesses within the scope of the POA scheme, or
increasing the monthly payments for some businesses already within the scheme.
Legislation will be introduced to amend the POA scheme to allow affected
businesses to apply to HMRC to exclude the output tax due under the reverse
charge from the calculation to establish whether a business is in the POA scheme
or the size of monthly payments a business in the scheme has to make.
vii) Reverse Charge Sales Lists
The following is an outline of how Reverse Charge Sales Lists (RCSLs) will
- the RCSL system will be web-based, accessed through the Government
- businesses will have to notify HMRC within 30 days of
making their first supply to which the reverse charge applies, and also when
they cease to make such supplies;
- if they subsequently re-commence making such supplies, they will have to
- businesses making sales to which the reverse charge applied must submit a
list for each period, or make a “nil declaration” for any period that the
business did not make any relevant supplies but had not notified cessation of
- RCSLs may be submitted by keying data on-line or submitting bulk data via
a CSV (comma-separated value) file;
- RCSLs, covering the same period as the VAT return, must be submitted
within 30 days of the end of the business’s VAT return period in which the
supplies are made; and
- the information required will be, for each customer, their VAT
registration number and the total value of reverse charge supplies made
each calendar month to that customer.
The technical specification for the RCSL CSV file for bulk upload is
published on the HMRC website (via “VAT Reverse Charge for mobile phones, and
computer chips” on the HMRC VAT internet page).
viii) Other practical issues
Completion of the VAT return
Suppliers of goods under reverse charge accounting must not
enter in Box 1 of the VAT return any output tax on sales to which the reverse
charge applies, but must enter the value of such sales in Box 6.
Customers must enter in Box 1 of the VAT return the output tax on purchases
to which the reverse charge applies, but must not enter the
value of such purchases in Box 6. They must reclaim the input tax on their
reverse charge purchases in Box 4 of the VAT return and include the value of the
purchases in Box 7, in the normal way.
When making a sale to which reverse charge accounting applies, suppliers must
show all the information normally required to be shown on a VAT invoice and must
also annotate the invoice to make it clear that the reverse charge applies and
that the customer is required to account for the VAT. The amount of VAT due
under the reverse charge rules must be clearly stated on the invoice but should
not be included in the amount shown as total VAT charged. The precise wording is
not prescribed in law and discussions with business have highlighted the need to
keep the annotation short. Either of the following would be acceptable:
- customer to pay output tax of £X to HMRC
- UK customer to pay O/T of £X to HMRC
Alternatively, any of the following would also be acceptable, provided that
the amount of tax is shown elsewhere on the invoice (but not in box for total
output tax charged):
- VAT Act 1994 Section 55A applies
- s55A VATA 94 applies
- customer to account for the VAT to HMRC
- Reverse charge supply - customer to pay the VAT to HMRC
- customer to pay VAT to HMRC
- UK customer to pay VAT to HMRC.
Cash Accounting Scheme
Businesses using the cash accounting scheme which purchase or sell goods to
which the reverse charge applies should exclude these transactions from the
scheme and account for them under the reverse charge accounting provisions.
Flat Rate Scheme
It is unlikely that many businesses using the flat rate scheme will be
involved in transactions of goods to which the reverse charge applies but, if
they are, they should exclude these from the scheme and account for VAT in
accordance with the reverse charge accounting provisions.
Second-hand Margin Scheme
Where relevant goods are sold under a second-hand margin scheme, the reverse
charge will not apply.
Penalties – ‘light touch’
HMRC understands the difficulties businesses may have in implementing the
reverse charge and will, where there is no loss of tax, apply a light touch in
dealing with errors that occur in the first six months after introduction of the
B. Draft legislation
Section 19 Finance Act 2006 introduced a new s55A and s26AB into the VAT Act
1994, as well as amending other provisions of the Act. These will be brought
into effect from 1 June 2007. Under the powers contained in these provisions and
existing powers in the VAT Act, the following statutory instruments will be
- the Value Added Tax (Section 55A) (Specified Goods and Excepted Supplies)
Order, which details the goods to which the reverse charge applies and
supplies which will be excluded from the reverse charge -
- the Value Added Tax (Payments on Account) (Amendment) Order, which amends
the payment on account rules -
- the Value Added Tax (Administration, Collection and Enforcement) Order to
amend para 2(3B) of Schedule 11 to the VAT Act to allow regulations to be made
to facilitate the introduction of reverse charge sales lists -
(PDF 33K) and
- the Value Added Tax (Amendment) Regulations, which amend regulations
relating to bad debt adjustments, the cash accounting and flat rate schemes
and introduce the details of the reverse charge sales lists -
Annex D (PDF 43K)
. They also make consequential changes to the VAT accounting regulations.
- the Value Added Tax (Amendment) (No.2) Regulations implementing
regulations relating to the cessation and recommencement of reverse charge
sales lists -
Annex E (PDF 32K).
A copy of the draft legislation is attached for information and any comment.
Comments should be sent as soon as possible please (and by no later than 11
April 2007) by email to Anti VAT Fraud.
Further dialogue with business
HMRC remains committed to working closely with affected businesses and their
advisers – as well as the software developers that support those businesses – to
facilitate a smooth implementation of the reverse charge.
Further guidance material will be issued before the end of March, and, as
necessary, meetings and/or workshops will be organised (depending on need and
In the meantime any specific questions comments or concerns – about the terms
of this Business Brief or more generally – can be sent by email to Anti VAT
About the Author
© Crown Copyright 2007.
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Article Published/Sorted/Amended on Scopulus 2007-03-20 21:19:36 in Tax Articles