Can FreeAgent handle the reverse charge?

What is the reverse charge anyway?

HM Revenue changed the rules on 1st January 2010.

If you buy goods or services from abroad after that date, and you belong in the UK, then you may have to use the reverse charge mechanism to account for VAT.

Goods or services that you sell abroad don't come into this equation, because in that case it's your customer who will account for VAT.

Basically, that means:

• Work out the VAT you would have paid on that item if you'd bought it from a VAT-registered supplier in the UK.
• Add that amount to box 1 on your VAT return.
• Then add it to box 4 on your VAT return too, assuming you're entitled to claim this VAT back.
• Add the net amount to box 6 and box 7.

So if you buy services worth £25 from a supplier in France, you'd work out the VAT you would have incurred on that (25 x 1/6 = £4.17) and add £4.17 to boxes 1 and 4.

Then add the total amount - £25 - to boxes 6 and 7.

The net effect?

£nil!

Can't FreeAgent handle that automatically?

Not yet!

Is there a workaround?

You'd need to enter the expense as 0% VAT, then post the total amount of reverse charge VAT for that quarter, as two journal entries, both dated the last day of the VAT quarter.

The debit entry goes to code 818 VAT Reclaimed and the credit entry to code 819 VAT Charged.

In the above example, the amount to use would be £4.17 - the VAT.

OK, that sorts out boxes 1 and 4, what about boxes 6 and 7?

There's no way to adjust those in FreeAgent, unfortunately.

You'd need to adjust the figures you put on your form.

So in the above example, let's say FreeAgent gave you a figure of £1,000 for box 6 and £500 for box 7.

When you fill in your green form, you'd add £25 to each of these, so you'd put £1,025 in box 6 and £525 in box 7.