As businesses increasingly rely on services from international suppliers like Microsoft, Google, and Facebook, one question often arises: Can I recover VAT on invoices from these companies? This is an important topic for business owners looking to maximise efficiency and ensure compliance with VAT regulations.
Understanding VAT on International Suppliers
When dealing with suppliers like Microsoft, Google, and Facebook, it’s important to recognise that these companies typically operate out of the Republic of Ireland. Consequently, their invoices often include Irish VAT. For UK businesses, the rules surrounding VAT recovery on such invoices are specific and require careful handling.
Why Can’t I Claim VAT on These Invoices?
Although some invoices from these suppliers may appear to charge VAT at 20%, this is not UK VAT—it’s Irish VAT. HMRC does not allow you to reclaim VAT charged by foreign suppliers unless specific rules apply, which is not the case here. Attempting to claim this Irish VAT could lead to penalties or compliance issues during an HMRC audit.
As a result, if you fail to address this correctly, these services become 20% more expensive than necessary. However, there’s a straightforward way to avoid this extra cost.
How to Avoid Paying Irish VAT: The Reverse Charge Mechanism
The solution lies in the reverse charge mechanism, a rule designed to streamline VAT compliance for cross-border transactions within the EU and beyond. By providing your UK VAT number to suppliers like Microsoft, Google, or Facebook, they will remove the Irish VAT from your invoices. Instead of being charged VAT upfront, you account for the VAT yourself through your VAT return.
Steps to Implement the Reverse Charge:
- Provide Your VAT Number: Register your VAT number with the supplier through their billing portal or account settings.
- Review Your Invoice: Ensure the invoice no longer includes Irish VAT and notes that the reverse charge applies.
- Account for VAT: Declare the VAT amount on your VAT return under the reverse charge procedure. You’ll typically record the VAT as both output tax (tax you owe) and input tax (tax you reclaim), resulting in a net-zero effect on your VAT liability.
Why This Matters to Your Business
Understanding and applying the reverse charge mechanism offers several benefits to business owners:
- Cost Savings: Avoid paying unnecessary Irish VAT, reducing costs by 20%.
- Compliance Assurance: Stay on the right side of HMRC by following the correct VAT recovery rules.
- Improved Cash Flow: Retain more working capital by avoiding overpayment of VAT.
- Accurate Reporting: Ensure your VAT returns reflect proper cross-border transactions, minimising the risk of penalties or audits.
Common Mistakes to Avoid
- Not Registering Your VAT Number: Failing to update your supplier with your VAT details results in being charged unnecessary VAT.
- Claiming Irish VAT: Attempting to reclaim foreign VAT can lead to compliance issues and financial penalties.
- Ignoring Reverse Charge Accounting: Forgetting to account for VAT correctly can lead to inaccurate VAT returns and potential fines.
Check out our list of common VAT errors to learn more.
Example of the Reverse Charge in Action
Let’s say your business receives a monthly invoice from Microsoft for £1,000, which includes Irish VAT of £200. By providing your UK VAT number:
- Microsoft will issue a revised invoice for £1,000 (without the £200 VAT).
- You account for £200 VAT as both input and output VAT on your VAT return, achieving a net-zero effect.
- Your cost remains £1,000 instead of £1,200, saving your business money and ensuring compliance.
Optimising VAT Processes for Your Business
As your business grows, managing VAT on cross-border transactions becomes increasingly important. Tools like accounting software (e.g., Xero, QuickBooks) and expert advice from accountants can simplify the process and keep you compliant. By implementing best practices for VAT recovery, you’ll avoid unnecessary costs, improve cash flow, and safeguard your business from regulatory risks.
If you’re unsure about handling VAT on invoices from Microsoft, Google, Facebook, or similar suppliers, consulting with an experienced accountant is highly recommended. Their guidance can help you optimise your processes and focus on growing your business.
We’ve recently been asked whether VAT can be recovered on invoices from Microsoft and similar suppliers eg Google and Facebook.
It is important to follow the VAT rules set out by HMRC to ensure that you are not penalised at a later time for over-claiming VAT. Equally, it is important to understand these rules to ensure that you don’t pay more for a service than you have to.
All these businesses provide services and are based in the Republic of Ireland. As a result they charge Irish VAT.
Confusingly these invoices may well detail VAT at 20% and so you may be tempted to claim the VAT as you would for most of your other supplier invoices. However, this Irish VAT should not be claimed.
Due to the fact that you can’t claim this VAT, the service is 20% more expensive than you might have expected it to be. However, there is no need for this to be the case.
To avoid this extra cost, all you need to do is provide the supplier with your VAT number and the VAT will be removed from your invoices under what is known as the “reverse charge”.
If you need help with this, or with other advice, then please get in touch with our tax accounting team.