Six costly mistakes charities commonly make on reverse charge VAT

As part of our advisory work and while delivering VAT training we encounter several common errors involving the reverse charge rules for overseas purchases of services. These mistakes are increasingly more common and can result in a significant VAT bill or in an organisation having to register for VAT and so it is crucial that these are understood to avoid any nasty surprises.

We previously covered the reverse charge rules in a prior article as well as in our International Aspects of VAT Made Simple guide which gives more detail. However, we wanted to highlight some of the common problem areas we come across, to raise awareness, and so that you can check you are fully complying with the rules.

1. Thinking that the reverse charge only applies to spend in the EU

This is linked to the idea that the reverse charge no longer applies now that the UK has left the EU. While some rules did change on leaving the EU, the reverse charge is very much here to stay.

There is no change to the pre-Brexit rules, with it needing to be considered for all purchases from overseas that have a place of supply in the UK, not just including/excluding those from suppliers in the EU.

2. Not identifying which suppliers are based overseas and not UK VAT registered

The first step to being able to account for the VAT reverse charge is being able to identify which suppliers it may apply to. If you cannot identify spend with overseas, non-UK registered suppliers then you have no way to review these for the reverse charge. You must check individual invoices to determine if a supplier is based overseas but common potential examples are online companies or software providers such as Facebook (Meta), Zoom and Microsoft amongst others.

3. Not identifying that expenses or card spend are with an overseas supplier

Following on from the above, while some organisations correctly identify overseas spend processed via invoices, the system for processing expenses and debit/credit card transactions may be different and not identify overseas spend. While the amounts involved may be less significant, it is important to ensure that all overseas spend is identified and that the reverse charge is applied where appropriate.

4. Wrongly declaring a purchase is for business purposes

Some providers (notably Facebook) will ask when purchasing advertising whether or not the purchase is for a business purpose. We have noted that some organisations have answered yes to this question, presumably as the purchaser assumes that as the charity is a company, the purchase qualifies as for business purposes.

This may not be correct. To qualify as for business purposes, the organisation must qualify as a business under the place of supply rules. This requires an organisation to have at least some business activities. If your organisation is only funded by grants and donations then this will not be the case and therefore you should not state that the purchase is for a business purpose. Our previous article and our Made Simple guide have more details on these.

5. Not implementing the reverse charge on advertising purchases on social media

HMRC clarified in September 2020 that they do not consider social media advertising to qualify for zero rating. While this is being challenged through the Charity Tax Group, a charity should be aware that HMRC will challenge any treatment not in line with their stated policy and therefore charities are expected to pay the VAT due on those services.

6. Budget holders not understanding the reverse charge rules

Even where the reverse charge is correctly applied, we frequently find that the rules are poorly understood outside the finance team, and that this can appear as an additional ‘cost’ to budget holders. It is important to ensure that budget holders understand the implications of using suppliers based overseas, particularly when comparing prices for services to ensure that they are factoring in any irrecoverable VAT from the reverse charge when making decisions.