What is the reverse charge mechanism in UAE VAT and how should you record it in the books of accounts?

The reverse charge mechanism is a process under which responsibility of paying tax to Government shifts from seller to buyer. It is only applicable if purchases are made outside the UAE (excluding GCC states). Since a seller does not have business in UAE, the whole process revolves around the receiver of the goods and services. It is the importer or the receiver of the goods and services who pays tax to the Government.

Entries in the books of accounts:

1) Journal for import

Purchase & Expense A/c     XXX

VAT - RCM A/c                   XXX

      To Vendor's A/c                    XXX

      To VAT payable - RCM A/c     XXX

2) Journal for VAT adjustment:

VAT payable - RCM A/c       XXX

      To Input VAT - RCM A/c        XXX