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Revenue and Customs Brief 24/07


HM Revenue and Customs -Tax Authorities

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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:

  1. Mobile telephones; and
  2. 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 reverse charge.

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:

A) provide:

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 contracts;

iii) guidance, to both retailers and wholesalers, on the operation of the de minimis rules;

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 Account;

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); and

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 reverse charge.

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 operate:

  • the RCSL system will be web-based, accessed through the Government Gateway;
  • 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 renotify HMRC;
  • 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 such supplies;
  • 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 reverse charge.


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 made:

  1. 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 - Annex A (PDF 34K)
  2. the Value Added Tax (Payments on Account) (Amendment) Order, which amends the payment on account rules - Annex B (PDF 34K)
  3. 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 - Annex C (PDF 33K) and
  4. 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.
  5. 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 demand).

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 Fraud.

About the Author

© Crown Copyright 2007.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.

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Article Published/Sorted/Amended on Scopulus 2007-03-20 21:19:36 in Tax Articles

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