VAT reverse charge

What is reverse charge VAT?

The VAT reverse charge means the customer accounts for VAT instead of paying it to the supplier. The customer records output tax and, if entitled, reclaims input tax on the same return. Seeing "reverse charge" on an invoice does not mean the supply is VAT exempt.

How it works

Under the reverse charge, the customer acts as both supplier and recipient for VAT accounting. Two situations covered here are UK construction services and services bought from abroad. For imported goods, postponed VAT accounting is a useful goods equivalent: GOV.UK treats it as a separate mechanism, rather than calling it a reverse charge. This table summarises those distinctions.

Reclaiming input tax depends on the normal rules. A matching output and input entry produces no net VAT cost only where the input tax is fully recoverable. Our zero-rated vs VAT exempt guide explains why exempt supplies can affect recovery.

Construction: when the domestic reverse charge applies

It must be used for most standard- or reduced-rated building and construction services between UK VAT-registered businesses where the payment is reported within the Construction Industry Scheme (CIS). The covered services follow CIS construction operations, except for supplies of workers by employment businesses.

Covered work includes constructing, altering, repairing, extending, demolishing or dismantling buildings and structures; works forming part of the land, such as walls, roads and pipelines; and installing heating, lighting, air-conditioning, ventilation, power, drainage, sanitation, water or fire protection systems. It also includes internal cleaning during construction, painting and decorating, and integral work such as site clearance, groundworks, scaffolding and landscaping.

Exceptions to check

The reverse charge does not apply where an end user or intermediary supplier has told its supplier in writing that it has that status. An end user is a VAT- and CIS-registered business that does not make onward supplies of the construction services it receives. Building contractors are not usually end users. Private domestic customers are not VAT registered, so supplies to them are outside this reverse charge. An employment business supplying workers is also outside it.

When supplied on their own, the exclusions include drilling for oil or gas; extracting minerals and tunnelling or underground works; manufacturing building components or delivering them to site; professional work by architects, surveyors and consultants; artworks; signwriting and signboards; installing seating, blinds and shutters; and installing security systems.

Buyers should check that the supplier has a valid VAT number. Suppliers should check the customer's UK VAT number and CIS registration. Use the CIS online check; some contractors do not appear there and can confirm that they report under CIS. For the detailed end-user, intermediary and mixed-supply tests, see the GOV.UK technical guide. Construction readers can also see our accountants for construction page.

What the invoice must say

Include all the information required on a VAT invoice and the words "reverse charge". State that the domestic reverse charge applies and the customer must account for the VAT. Show the VAT due under the reverse charge, but exclude it from the amount charged. If the amount cannot be shown, state the VAT rate instead.

GOV.UK gives supporting wording such as "VAT Act 1994 Section 55A applies", "S55A VATA 94 applies" or "Customer to pay the VAT to HMRC". These sit alongside the required reverse charge reference. If software cannot show the VAT amount, add wording such as "customer to account to HMRC". See HMRC's supplier guidance.

The return and an illustrative invoice

Suppliers enter the net sale value on their return without output tax on the reverse charge sale. Buyers add the VAT to their output tax total and reclaim input tax subject to the normal rules. HMRC's buyer guidance sets out the buyer's responsibilities. For the filing process, use our VAT return guide.

For illustration, a sub-contractor invoices £10,000 for covered work at 20%. The invoice shows £2,000 VAT due under the reverse charge and the required wording. The customer pays £10,000, rather than £12,000, and records £2,000 output tax. If all the input tax is recoverable, the £2,000 reclaim makes the net VAT effect nil.

Cash flow and VAT schemes

The supplier no longer receives VAT from the customer. This can lead to repayment returns; a business can apply for monthly returns through its online VAT account, as explained in the technical guide.

For illustration, a supplier has £30,000 net sales in a quarter, all under the reverse charge, and £8,000 of purchases carrying £1,600 recoverable VAT. With £0 output tax charged, the return shows a £1,600 repayment. If those sales had carried normal VAT of £6,000, the net amount would instead have been £4,400 payable. These examples assume the stated treatment and recovery conditions; they do not decide the treatment of a reader's supplies.

Flat Rate Scheme users account for reverse charge supplies outside that scheme. Buyers account for and recover the VAT on the same return, subject to normal recovery rules; suppliers exclude those sales from their flat rate calculation. The Cash Accounting Scheme cannot be used for reverse charge supplies.

Services bought from abroad

Under the current rules, the reverse charge applies where the place of supply is the UK, the supplier belongs outside the UK, the customer belongs in the UK and the supply is not exempt. For services outside the business-to-business general rule, the customer must also be UK VAT registered. It can apply even if the overseas supplier has a UK VAT number; it does not apply where both parties belong in the UK.

HMRC's examples of general-rule services include customised software on a disc from a US business and legal services from a French business. Give the supplier your UK VAT number as evidence of registration. Check the place-of-supply rules before choosing the treatment: an overseas address alone does not settle it.

Credit your VAT account with output tax on the full supply value and debit the input tax you are entitled to recover. VAT Notice 741A, section 5 gives these return entries:

• Box 1: output tax due under the reverse charge.
• Box 4: input tax recoverable under the normal rules.
• Box 6: the full value of the service, in the sales total.
• Box 7: the full value of the service, in the purchases total.

For illustration, a VAT-registered UK company buys £1,000 of consultancy from a US business, with 20% UK VAT due under the reverse charge. It enters £200 in box 1, £200 in box 4 if fully recoverable, and £1,000 in each of boxes 6 and 7. Full recovery means a nil net effect. A business unable to reclaim any of that input tax bears the £200; exempt supplies can limit recovery.

If the UK business is not VAT registered

Under the current rules, overseas business-to-business general-rule services count towards the customer's VAT registration threshold. See our VAT registration threshold guide and how to register for VAT. Land and property services, restaurant and catering, admission to an event, work on goods, passenger transport and use and enjoyment cases are reverse charged only if the UK customer is VAT registered. Otherwise the supplier accounts for UK VAT on those services.

Imported goods: postponed VAT accounting

The goods equivalent covered here is postponed VAT accounting, rather than a reverse charge in GOV.UK terminology. VAT-registered businesses can declare and recover import VAT on the same return instead of paying at the border and reclaiming later. No approval is needed for goods imported into Great Britain from outside the UK, or into Northern Ireland from outside the UK and EU. Use monthly postponed import VAT statements: box 1 for VAT due, box 4 for VAT reclaimed under normal input tax rules, and box 7 for imports' total value excluding VAT. See eligibility and HMRC's import return instructions.

Check the rules for your supply

Rules can change. Check current GOV.UK guidance, including the construction reverse charge overview, before applying a treatment. This guide is general information; RR Accountants is not HMRC. An authorised accountant can deal with HMRC for you.