Tax

What is Reverse Charge VAT?

Reverse charge VAT is a system where the customer, not the supplier, accounts for the VAT on a sale. The customer records the VAT as both output VAT and input VAT on their own return, so the net effect is usually nil.

Example

A UK business buys consultancy services from a supplier abroad. The UK business accounts for the UK VAT itself under the reverse charge, and usually reclaims it as input VAT on the same return.

Key Dates

Account for the VAT on the return covering the date of the supply

How Reverse Charge VAT Works in Practice

Reverse charge VAT shifts responsibility for accounting for VAT from the supplier to the customer. Instead of the supplier charging VAT and paying it to HMRC, the supplier issues an invoice without VAT, and the customer works out the VAT due and records it on their own VAT return. The invoice should carry wording such as reverse charge to make this clear.

The customer treats the VAT as output VAT, as if they had charged it, and as input VAT, as if they had paid it and are reclaiming it. If the customer can reclaim all their input VAT, the two amounts cancel out and no cash changes hands. The purpose of the reverse charge is to stop VAT being lost through fraud or where the supplier is overseas and not registered in the UK.

There are two main UK cases for small businesses. The first is services bought from a supplier based abroad, where a UK VAT registered business generally accounts for the UK VAT itself. The second is the domestic reverse charge for building and construction services, which applies to certain services reported under the Construction Industry Scheme between VAT registered businesses. It does not apply where the customer is an end user or an intermediary supplier.

If you are the supplier under a domestic reverse charge, you do not charge VAT on the invoice and you must state that the reverse charge applies and that the customer must account for the VAT. If you are the customer, you add the VAT to the right figures on your return. Check the exact rules for your circumstances on gov.uk, because they are detailed and getting them wrong can cause errors.

Step by Step

As a customer under the reverse charge, you receive an invoice with no VAT charged and a note that the reverse charge applies. You calculate the VAT at the correct rate and enter it on your VAT return as VAT due on the purchase, and also as VAT you can reclaim, provided you are entitled to reclaim it.

The sale and purchase values are included in the totals on your return as normal. Your accounting software should handle this if the right VAT code is chosen, so it is worth checking the setting for each supplier or purchase.

As a supplier, you still show the value of the supply on your return, but you do not include any VAT for it. Your invoice must make clear that the customer is responsible for the VAT.

Practical Tips

Set up a reverse charge VAT code in your accounting software and use it consistently
Ask your supplier to include the reverse charge wording on every invoice
Review a sample of reverse charge entries each quarter before filing
Check HMRC guidance if you are unsure whether a supply is covered

Common Mistakes to Avoid

Charging VAT on an invoice that should be subject to the reverse charge
Forgetting to record both the output and input VAT on the customer's return
Applying the domestic construction reverse charge to end users, which is not correct
Leaving the reverse charge wording off the invoice

Frequently Asked Questions

Who pays reverse charge VAT?

The customer accounts for it, but if they can reclaim the VAT in full, there is usually no net cost. The supplier does not charge VAT on the invoice.

Does reverse charge VAT apply to services from abroad?

In general, a UK VAT registered business that buys services from an overseas supplier accounts for UK VAT itself under the reverse charge. Check gov.uk for the exact rules for your purchase.

What is the domestic reverse charge for construction?

It applies to certain construction services reported under the Construction Industry Scheme, supplied between VAT registered businesses. The customer accounts for the VAT instead of the supplier.

What should a reverse charge invoice say?

It should say that the reverse charge applies and that the customer must account for the VAT. Many invoices use the wording reverse charge.

Source: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services

Related Terms

VAT (Value Added Tax)

VAT is a tax added to most goods and services sold in the UK. Businesses collect it from customers and pay it to HMRC, minus any VAT they've paid on business purchases.

Input VAT

Input VAT is the VAT you pay on business purchases. You can usually reclaim this from HMRC on your VAT return.

Output VAT

Output VAT is the VAT you charge customers on your sales. You collect it from customers and pay it to HMRC.

VAT Return

A VAT return is a regular submission to HMRC showing the VAT you've charged (output VAT) and paid (input VAT), with the difference paid or reclaimed.

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