VAT Reverse Charge shifts the responsibility for reporting VAT from the supplier to the customer. As a result, businesses must adjust how they handle VAT on certain transactions.
How VAT Works Without the Reserve Charge
All VAT-registered businesses must add VAT to most goods and services they provide. They also pay VAT on purchases they make.
Under normal VAT rules,
- The supplier adds VAT to the invoice
- The customer pays the total amount (including VAT)
- The supplier sends the VAT to HMRC
As a result, the supplier manages the VAT process from start to finish. Meanwhile, the customer pays the invoice and reclaims VAT where allowed.
What the VAT Reverse Charge Does
The VAT Reverse Charge changes this process. Instead of the supplier charging VAT, the customer accounts for it.
This means:
- The supplier issues an invoice without VAT
- The customer calculates the VAT themselves
- The customer reports it on their VAT return
Although no VAT payment passes between the supplier and customer, the transaction still appears on the VAT return. Therefore, HMRC can track the VAT correctly.
When the Charge Applies
The VAT Reverse Charge applies in specific situations. Generally, all of the following must apply:
- Both supplier and customer are VAT-registered
- The transaction is Business-to-Business (B2B)
- The goods or services fall within Reverse Charge rules
It commonly applies to:
- Cross-border services
- Construction services under the Construction Industry Scheme (CIS)
- Wholesale energy supplies
- Telecommunications and electronic goods
You should always review each transaction, as rules can vary depending on the sector.
How the Reverse Charge Works in Practice
If a UK business buys services from overseas:
- The supplier sends an invoice without VAT
- The UK business calculates VAT at the UK rate
- The business then includes this VAT on its VAT Return
As a result, the business records:
- Output VAT (VAT due)
- Input VAT (VAT reclaimable, if eligible)
These amounts usually cancel each other out. Therefore, the process has no cash flow impact for fully taxable businesses.
When the Reverse Charge Does Not Apply
The Reverse Charge does not apply in all cases, such as:
- Sales to non-VAT-registered customers
- Supplies to end users
- VAT-exempt goods and services
- Work carried out outside the UK
In these cases, normal VAT rules apply. Therefore, you should always confirm the correct treatment before invoicing.
How to Calculate Reverse Charge VAT
You calculate Reverse Charge VAT using the standard VAT rate.
For instance,
| Net Invoice | £1,000 |
| VAT at 20% | £200 |
If the invoice uses a foreign currency, you must:
- Convert the value into Pounds Sterling
- Use the exchange rate on the invoice date
- Then calculate the VAT amount
This ensures your VAT return reflects accurate figures.
How to Show the Charge on a VAT Return
You must include Reverse Charge VAT in two places:
- VAT due
- VAT reclaimable (if allowed)
You should also include the net value of the purchase in your VAT records. This cancels the VAT in the same return. Therefore, it avoids delays in reclaiming VAT.
How to Invoice Under the Reverse Charge
If you supply goods or services under the Reverse Charge, you must issue the invoice correctly.
You should:
- Show the net amount only
- Not charge VAT
- Include a note that the Reverse Charge applies
For example: You may include wording such as “Reverse Charge: customer to account for VAT to HMRC”.
Selling to Businesses Outside the UK
If you sell to a VAT-registered business outside the UK:
- You do not charge VAT
- You state that the reverse charge applies
- The customer accounts for VAT in their country
You should clearly show on the invoice:
- The services provided
- The place of supply
- A note explaining why VAT in not charged
As a result, both parties understand their responsibilities.
Domestic vs International Reverse Charge
The domestic Reverse Charge applies within the UK. It mainly affects the construction sector under CIS. On the other hand, the international Reverse Charge applies to cross-border services.
Although both follow the same principle, they apply in different situations. Therefore, businesses must understand which rules apply to each transaction.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.