Reverse charge VAT explained: services, construction and goods

Normally the business making a sale charges VAT and pays it to HMRC. The reverse charge flips that: the business receiving the supply works out the VAT and declares it on its own return. It exists to stop VAT going unpaid where the supplier is overseas and has no reason to register in the UK, or where fraud has been a problem, as in construction and mobile phone trading.

How the reverse charge works

When a supply falls under the reverse charge:

• the supplier does not charge VAT on its invoice
• the customer calculates the VAT at the rate that would have applied
• the customer includes that VAT as output tax in box 1 of its VAT return
• the customer reclaims the same amount as input tax in box 4, to the extent it is entitled to

For a fully taxable business the two entries cancel out, so the reverse charge changes the paperwork rather than the cost. A business that cannot reclaim all its VAT, such as a partly exempt insurance broker or a charity, ends up paying the VAT it could not recover, which puts it in the same position as if it had bought from a UK supplier.

Services bought from overseas suppliers

Most business-to-business (B2B) services are supplied where the customer belongs. When a UK business buys services such as consultancy, software development, advertising or legal advice from a supplier based outside the UK, the place of supply is the UK and the UK customer applies the reverse charge.

Worked example

A UK design agency buys £2,000 of developer time from a freelancer in Spain. The freelancer invoices £2,000 with no UK VAT. On its return the agency:

The net effect on box 5 is nil.

Some services follow different place of supply rules, for example services connected with land (taxed where the land is), admission to events, passenger transport and restaurant services. No reverse charge VAT is due on services that would be exempt or zero-rated if supplied in the UK.

Reverse charge and the registration threshold

If you are not VAT-registered, the value of reverse charge services you receive counts towards your taxable turnover for the £90,000 registration test. This catches businesses that make exempt sales, such as some medical practices and financial firms, which can be pushed into registration by buying services from abroad.

The construction domestic reverse charge

Since 1 March 2021 the domestic reverse charge applies to many building and construction services supplied in the UK. It applies when all of these are true:

• the supply is standard-rated or reduced-rated building and construction work
• the supplier and customer are both registered for VAT
• the supply is reported under the Construction Industry Scheme (CIS)
• the customer is not an end user or an intermediary supplier connected to the end user

An end user is a business that receives construction services but does not make onward supplies of them, such as a property owner commissioning an extension to its offices. End users and intermediaries must tell their suppliers in writing that they are end users, and they then pay VAT normally.

What the supplier does

The subcontractor does not charge VAT. The invoice must still show the VAT rate and the amount of VAT the customer must account for, with wording such as “Reverse charge: customer to account for VAT to HMRC”. The net value goes in box 6 and nothing goes in box 1.

What the customer does

The contractor works out the VAT at the correct rate, puts it in box 1 and reclaims it in box 4, and puts the net value in box 7.

The 5% disregard

If a supply includes reverse charge services but they make up 5% or less of the total value, the reverse charge does not apply to that invoice and VAT is charged normally. If they make up more than 5%, the whole supply is reverse charged.

Cash flow for subcontractors

Subcontractors under the reverse charge stop collecting output VAT on most sales but still pay VAT on their materials and costs. Many move into a repayment position. HMRC lets businesses that are regularly due repayments switch to monthly returns, which speeds up the cash.

Specified goods and services

A separate domestic reverse charge applies to supplies between VAT-registered businesses of:

• mobile phones and computer chips, where the VAT-exclusive value of the invoice is £5,000 or more
• wholesale supplies of gas and electricity
• emissions allowances
• wholesale telecommunications services
• certain supplies of gold between VAT-registered businesses, under separate gold rules

Suppliers of mobile phones and computer chips under the reverse charge must also submit a Reverse Charge Sales List to HMRC alongside their VAT return.

Imports of goods are different

Goods imported into Great Britain are not reverse charged in the strict sense, but postponed VAT accounting works in a similar way: you declare the import VAT in box 1 and reclaim it in box 4 on the same return, instead of paying it at the border.

Common mistakes

• Charging VAT on a reverse charge invoice. The customer is then charged twice, and the supplier owes HMRC the VAT it charged in error. Reissue the invoice.
• Forgetting the box 1 entry. Claiming the VAT in box 4 without declaring it in box 1 overclaims input tax.
• Applying the construction reverse charge to an end user. Get written confirmation of end user status before invoicing.
• Ignoring overseas subscriptions. Software and advertising bought from suppliers outside the UK often need a reverse charge entry, and are easy to miss in bank feeds.

Frequently asked questions

Who pays the VAT under the reverse charge?

The customer accounts for it on its own VAT return. The supplier invoices without VAT.

Does the reverse charge cost my business money?

Not if you are fully taxable, because you reclaim the same amount you declare. Partly exempt and non-business organisations pay the VAT they cannot reclaim, as they would on a UK purchase.

What wording goes on a construction reverse charge invoice?

The invoice should state that the reverse charge applies, for example “Reverse charge: customer to account for VAT to HMRC”, and show the VAT rate and the VAT amount the customer must account for.

Does the construction reverse charge apply to zero-rated work?

No. It only applies to standard-rated and reduced-rated building and construction services. Zero-rated work, such as building a new home, is outside it.

Do I apply the reverse charge to Google or Facebook advertising?

It depends on which company invoices you. If the supplier is based outside the UK and invoices without UK VAT, a VAT-registered UK business applies the reverse charge. If a UK entity invoices you with UK VAT, you reclaim the VAT normally.