Section B - Case 1 (NovaStream Ltd)

NovaStream Ltd, a UK tech startup providing cloud services, purchases specialized server maintenance software from a company based in the USA for £5,000.

How should NovaStream Ltd account for VAT on this transaction on its UK VAT return?

When a UK VAT-registered business purchases standard-rated services from an overseas supplier, the 'reverse charge' applies. NovaStream Ltd must account for output VAT on the £5,000 purchase (£5,000 x 20% = £1,000) in Box 1 of its VAT return. It can simultaneously reclaim this £1,000 as input VAT in Box 4, assuming the software is used to make taxable supplies. The net effect on VAT payable is nil.