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Value added tax (VAT)Section BVATInternational ServicesReverse Charge

ACCA · Question 19 · Value added tax (VAT)

Section B: Case 1 - QuantumLeap VR Ltd

Scenario: QuantumLeap VR Ltd is a virtual reality software developer. The company began trading on 1 January 2023. Its taxable turnover was £6,000 per month for the first 10 months. In November 2023, it secured a major contract, and taxable turnover jumped to £30,000 for November and £30,000 for December.

Question: QuantumLeap VR Ltd imports specialized 3D modeling services from a company based in the USA. How should QuantumLeap VR Ltd account for VAT on these imported services?

Answer options:

A.

The US company must register for UK VAT and charge it to QuantumLeap.

B.

No VAT is applicable as the services are outside the scope of UK VAT.

C.

Apply the reverse charge mechanism, declaring both output VAT and input VAT on the same return.

D.

Pay import VAT at the border before the services can be downloaded.

How to approach this question

Identify the transaction as a Business-to-Business (B2B) supply of services from overseas. The general rule for B2B services is that the place of supply is where the customer belongs. The UK customer must account for the VAT using the reverse charge mechanism.

Full Answer

C.Apply the reverse charge mechanism, declaring both output VAT and input VAT on the same return.✓ Correct
When a UK VAT-registered business receives standard-rated services from an overseas supplier, the place of supply is the UK (where the customer belongs). To account for the VAT, the UK business must use the reverse charge mechanism. This involves calculating the VAT and declaring it as output tax on their VAT return, and simultaneously claiming the same amount as input tax (subject to normal partial exemption rules).

Common mistakes

Confusing the rules for imported services with imported goods (which may require payment at the border or postponed VAT accounting).
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