VAT Reverse Charge Explained: When It Applies

What Is the Reverse Charge?

Under normal VAT rules, the supplier charges VAT and pays it to HMRC. The reverse charge flips this: the customer accounts for the VAT instead of the supplier. The customer includes both the output VAT (as if they'd supplied the service to themselves) and the input VAT on the same return.

The net effect is often zero — you charge yourself VAT and reclaim it simultaneously. But it changes who is responsible for the accounting.

When Does the Reverse Charge Apply?

Services from Overseas Suppliers

If you receive services from a supplier outside the UK (regardless of whether they're in the EU or elsewhere), you must account for VAT under the reverse charge. The supplier won't charge UK VAT — you account for it on your UK VAT return.

Example: You hire a web developer in the United States who charges you $5,000 (approximately £4,000) for services. No US sales tax is charged. You account for UK VAT: £4,000 x 20% = £800 in Box 1 (output VAT) and £800 in Box 4 (input VAT). Net impact: zero.

Construction Industry Reverse Charge

Since March 2021, the domestic reverse charge for construction services applies to supplies of specified construction services between VAT-registered businesses within the CIS (Construction Industry Scheme).

If you're a subcontractor supplying construction services to a CIS-registered contractor, you do not charge VAT. Instead, your customer accounts for VAT under the reverse charge.

Who it affects:

• Subcontractors: you invoice without VAT and note "reverse charge applies"
• Contractors (who aren't end users): you account for the VAT on behalf of your subcontractor

Who it doesn't affect:

• End users (the final customer in the chain — they receive normal VAT invoices)
• Supplies to non-CIS-registered businesses
• Supplies between connected parties in certain circumstances

Other Reverse Charge Situations

• Certain supplies of gas, electricity, and energy certificates
• Emissions allowances
• Wholesale telecommunications
• Mobile phones and computer chips (above certain value thresholds)

Impact on Your VAT Return

Under the reverse charge, you include the VAT in both Box 1 (output tax) and Box 4 (input tax). The net effect on Box 5 (VAT payable or reclaimable) is typically nil — provided you can fully reclaim input VAT.

If you make exempt supplies and can't fully reclaim input VAT, the reverse charge could create a net cost.

Invoicing Under the Reverse Charge

If you supply services subject to the reverse charge:

• Do not charge VAT on your invoice
• Include a note such as "Reverse charge: customer to account for VAT under section 55A VATA 1994" (for construction) or "Reverse charge applies" (for international services)
• Show the applicable VAT rate so your customer knows what rate to apply

Record-Keeping

Keep records of all reverse charge transactions, including:

• The value of the supply
• The VAT rate applicable
• Evidence that the reverse charge applies (e.g., supplier location, CIS status)

With Accounted, Penny automatically identifies reverse charge transactions and accounts for them correctly on your VAT return.

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