Normally the seller collects GST and pays it to the government. Reverse charge flips that. The buyer pays the tax directly.
It exists because some suppliers are outside the GST net, or are difficult to collect from. Rather than lose the tax, the law puts the obligation on the person receiving the service.
Where a small business usually meets it
- Goods transport agency services
- Legal services from an advocate
- Services from a director to the company
- Sponsorship
- Renting of motor vehicles in certain cases
- Imported services
The transport one catches the most people. A haulage bill with no GST on it is not a bill without tax. It is a bill where the tax is yours to pay.
Two things that trip businesses up
You must pay in cash. Reverse charge liability cannot be settled by using input credit. The money has to leave the bank.
You can usually claim it back. Once paid, the same amount is generally available as input credit in the same period, assuming the service is for business use. So the net cost is often nil, but the cash movement is real and the entry has to exist.
What it looks like when it goes wrong
Nothing, for about a year. Then a reconciliation turns up a set of transport bills with no corresponding reverse charge entry, and the liability arrives with interest attached.
The fix is small. Flag the handful of expense categories that attract reverse charge, and treat any bill in them as needing a second entry rather than one.
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