Can FreeAgent handle the reverse charge?

What is the reverse charge anyway?

HMRC changed the rules on 1st January 2010.

If you buy services (not goods) from other EC countries 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 service 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.  FreeAgent already adds it to box 7 for you.

So if you buy services worth £25 from a supplier in France, you'd work out the VAT you would have incurred on that, with the £25 being treated as the VAT-exclusive amount (£25 x 20% = £5) and add £5 to boxes 1 and 4.

Then add the VAT-exclusive amount - £25 - to box 6.

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 as you normally would for services bought from the EU, 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 £5 - the VAT.

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

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

You'd need to file your return through HMRC's online portal rather than directly with FreeAgent online, and adjust the figure you put on your form.

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

When you fill in your return, you'd add £25 to that, so you'd put £1,025 in box 6.