RCM Journal Entries Explained
Introduction
The Reverse Charge Mechanism (RCM) under UAE VAT is not just a tax reporting requirement but also an accounting exercise that must be accurately recorded in the books. Failing to record RCM entries properly can result in VAT return mismatches, compliance issues, and even penalties.
It break down RCM journal entries in simple steps, helping businesses correctly reflect the VAT impact in their accounting system.
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📌 What Is Reverse Charge Mechanism (RCM)?
RCM shifts the responsibility of VAT payment from the supplier to the buyer/recipient. It typically applies when:
• The supplier is located outside the UAE
• The supplier is not VAT-registered in the UAE
• Goods/services are imported into the UAE
• Certain specific local transactions (e.g., gold, oil, hydrocarbons, etc.)
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🧾 Key Accounting Impact of RCM
• VAT is not paid to the supplier but self-assessed and recorded as both output and input VAT by the recipient.
• The output VAT increases the tax liability.
• The input VAT may be recoverable (fully or partially) depending on business use.
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💡 Example Scenario
You receive consultancy services from a US-based company.
• Service value: AED 20,000
• VAT rate: 5% (RCM applies)
• Purpose: Used for taxable business activity
• Input VAT is recoverable
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📒 Journal Entries for RCM
✅ Step 1: Record the Purchase (Service/Expense)
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Dr. Professional Fees / Consultancy AED 20,000
Cr. Accounts Payable – Supplier AED 20,000
➡️ Record the value of the service invoice.
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✅ Step 2: Record Output VAT under RCM
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Dr. RCM Input VAT AED 1,000
Cr. RCM Output VAT AED 1,000
➡️ This reflects the VAT self-assessed under RCM. It appears in Box 6 and Box 10 of VAT Return.
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✅ Net Effect on Profit and Loss:
• No VAT impact if full input VAT is recoverable
• If not recoverable, VAT becomes an additional cost
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📘 If Input VAT Is Not Recoverable
If the expense is for exempt activities or personal use:
Additional Entry:
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Dr. Professional Fees / Expense AED 1,000
Cr. RCM Input VAT AED 1,000
➡️ This treats non-recoverable VAT as an additional business expense.
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📋 Summary of Journal Entries
Purpose Debit Credit
Record Expense Expense/Service A/c Supplier Payable A/c
Record RCM VAT (recoverable) Input VAT (RCM) Output VAT (RCM)
If not recoverable Expense/Service A/c (again) Input VAT (RCM)
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🧮 Tips for Accounting Teams
• Use separate ledger accounts for:
o RCM Output VAT
o RCM Input VAT
• Use VAT codes in your ERP/accounting software to auto-record RCM entries
• Reconcile RCM Output and Input VAT monthly
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📤 VAT Return Relevance (Form 201)
VAT Return Box Description
Box 6 Supplies subject to RCM (services)
Box 3 Imports through customs (goods)
Box 10 Input VAT recoverable on RCM expenses
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❌ Common Mistakes to Avoid
• Not booking any VAT entries for RCM
• Booking only output VAT but forgetting input VAT
• Recovering VAT without eligible business purpose
• Incorrect VAT box selection in the return
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✅ Final Thoughts
RCM accounting is straightforward once you understand the logic behind self-assessing VAT. The dual nature of output and input entries needs to be mirrored in your books properly to stay compliant.
Need help with RCM accounting or VAT returns?
👉 Contact Sheikh Anwar Accounting & Auditing LLC at
🌐 Visit us: www.sa-auditors.com
📧 Email: info@sa-auditors.com
📱 WhatsApp: +971-XX-XXXXXXX
