Glossary
What is a reverse charge?
When the supplier cannot charge your country's tax, you charge it to yourself. On most purchases the result is nil, but it still has to be recorded.
Updated
In short
A reverse charge makes the buyer, not the supplier, account for the VAT or GST on a purchase, typically on services bought from overseas. SimpleERP self-assesses it on bills from overseas suppliers where your country's profile uses it.
A reverse charge is a rule under which the buyer, not the supplier, accounts for the VAT or GST on a purchase. It is used mainly for services bought from overseas suppliers, who are not registered in the buyer's country, and in some countries for certain domestic trades. The buyer records the tax as output tax and, where allowed, reclaims the same amount as input tax.
Reverse charge: a worked example
Harbour Steel Furniture, a fictional business registered for tax at 20% and trading in US dollars, buys $1,000 of design services from an overseas studio. The studio charges no tax, so Harbour Steel accounts for it:
| Account | Debit | Credit |
|---|---|---|
| Design services (expense) | $1,000 | |
| Accounts payable: overseas studio | $1,000 | |
| Input tax 20% (reclaimed) | $200 | |
| Output tax 20% (self-assessed) | $200 |
Why record a reverse charge if the net is nil?
Because the tax authority expects to see both sides in the return, and a business that cannot reclaim all its input tax, for example because it also makes exempt sales, pays part of it. Leaving it out also understates the value of purchases in the return, which can trigger questions.
In India, GST has its own reverse charge rules for listed goods and services: see reverse charge mechanism (India).
FAQ
Questions, answered
When does the reverse charge apply?
Most often when a registered business buys services from a supplier abroad who is not registered in its country. Some countries also apply it to set domestic trades, such as construction services or scrap metal. Check your tax authority's list with your accountant.
Does a reverse charge cost my business money?
Usually not, if you can reclaim all your input tax: the same amount is added as output tax and taken off as input tax. A business that makes exempt sales, or is not registered, may bear some or all of it.
Does the supplier show tax on a reverse-charge invoice?
No. The supplier invoices without your country's tax, and many tax systems expect a note on the invoice that the reverse charge applies. You then account for the tax in your own return.
Does SimpleERP apply the reverse charge automatically?
On bills from overseas suppliers, where your country's profile uses it, yes: lines with no tax rate are self-assessed at your standard rate as output and input tax. Domestic reverse-charge trades are not automated; your accountant posts them with a journal.
Related
Keep reading
Input tax
The VAT or GST paid on purchases, usually reclaimed against the tax charged on sales.
Read moreZero-rated and exempt sales
Zero-rated: taxed at 0% with input tax reclaimable. Exempt: no tax and, usually, no reclaim of related input tax.
Read morePurchase
Purchase orders, supplier bills that receive stock, debit notes and payables.
Read more
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