What is the VAT Reverse Charge?

The VAT reverse charge means the responsibility for reporting and paying VAT on cross-border sales moves from the supplier to the customer if you’re a VAT registered business. We know the rules can be confusing, so we’ll explain how the VAT reverse charge affect you if your VAT-registered business buys things from other businesses outside of the UK.

How VAT normally works without the reverse charge

VAT (which stands for Value Added Tax) is a type of tax which VAT-registered businesses add on to the taxable goods and services they sell.

If you’re VAT registered, you’ll need to keep a record of what you sell and how much VAT you charge on each sale, as well as the VAT your business pays on things it buys from other VAT-registered businesses. You’ll use this information to send regular VAT returns so HMRC can work out whether you:

Paid more VAT than you collected on sales (which means you can reclaim the difference)
Collected more VAT than you paid out to other businesses (so you’ll owe the difference the HMRC)

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How does the VAT reverse charge work?

In a nutshell, the reverse charge is the amount of VAT you would’ve paid for a service or supply, if you had bought it in the UK.

Because the VAT is ‘reversed’ the responsibility of accounting for it is now on the customer, rather than the supplier. This also means the seller doesn’t need to register for VAT in the country where the ‘supply’ is made (the place of supply is the country that goods or services are supplied to).

For example

Let’s say you hired a web developer based in Spain to work on your website, and they charge you £200. The web developer won’t add VAT onto their invoice, but they will add a mandatory reference indicating the reverse charge needs to be applied.

You’ll include this on your return at the VAT standard rate of 20% – just like you would if you hired a web developer in the UK. 20% of £200 is £40 – so the reverse charge amount that needs to be added to your VAT submission is £40.

How do I calculate the reverse charge if the invoice is in a different currency?

You can’t apply the UK VAT rate if the invoice is in a different currency, so you’ll need to convert the value into sterling first, and then work out the VAT reverse charge. Use the currency exchange rate in use on the date of the invoice.

How do I show the VAT reverse charge on my VAT return?

You’ll actually include the reverse charge on your VAT return in two places:

Included in total amount of VAT you paid in that time period
And again, in the total amount of VAT you charged in the same time period (as if you were the one who supplied the services)

This effectively cancels the VAT charge out all in one VAT return, rather than paying it on one return only to reclaim it on the next. If you need any help or guidance, always ensure you speak to your accountant for more advice!

Does the reverse charge apply if a UK business sells to a business outside of the UK?

Yes, it still applies. It’s a similar process – just the other way round. So, you wouldn’t charge VAT on the sale, but your invoice will show the VAT reverse charge is included – leaving it up to the buyer to calculate the VAT and add a reverse charge onto their VAT return.

You need to ensure the invoice clearly shows the services provided, where you’re supplying them to, and why you are not charging VAT on the sale.

Is the VAT reverse charge the same thing as the VAT domestic reverse charge?

No, although they work on the same principle. The VAT domestic reverse charge is for individuals in the Construction Industry Scheme. Used like the reverse charge to combat VAT fraud, it makes the contractor responsible for adding VAT onto any supplies they buy, and then putting this on their VAT returns.

You can read all about the domestic reverse charge in our article.

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