What is reverse charge VAT?
Reverse charge VAT is a rule that makes the customer, not the supplier, account for the VAT on certain supplies, such as construction services and many services bought from abroad.
What reverse charge VAT means
Normally the supplier charges VAT on its invoice, collects it from the customer and pays it to HMRC. Under the reverse charge, the supplier does not charge VAT. Instead, the VAT-registered customer calculates the VAT itself and records it on its own VAT return as both output VAT and, where it is entitled, input VAT. For most businesses the two cancel out, so no money changes hands.
The rule exists to stop fraud, where suppliers collected VAT and disappeared without paying it over.
Where it applies
- Construction services: the domestic reverse charge applies to most building services reported under CIS between VAT-registered businesses, unless the customer is the end user or an intermediary supplier.
- Services from overseas: most business-to-business services bought from suppliers outside the UK, such as software subscriptions and advertising.
- Specified goods: including mobile phones and computer chips above a threshold, and certain wholesale energy and emissions trading.
Example
A VAT-registered electrician subcontracts to a main contractor on a housing development. The electrician invoices £10,000. Instead of adding £2,000 VAT, the invoice says: "Reverse charge: customer to account to HMRC for the VAT. VAT amount £2,000."
| Electrician's VAT return | Contractor's VAT return | |
|---|---|---|
| Output VAT | £0 on this sale | £2,000 |
| Input VAT | Reclaims VAT on own costs as normal | £2,000 |
| Net effect | Receives £10,000 only | Nil |
The electrician no longer receives £2,000 of VAT up front, which can turn them into a repayment trader. Many switch to monthly VAT returns to get refunds faster.
Why it matters for your business
Getting the reverse charge wrong in either direction causes problems. A supplier who charges normal VAT when the reverse charge applies may have to correct invoices, and a customer who pays VAT it should not have been charged cannot simply reclaim it. Invoices must carry the correct wording, and both sides need their accounting software set up with the right tax codes.
The change can also hit cash flow for subcontractors, who lose the temporary benefit of holding VAT until the return is due.
If you are unsure whether a job falls under the reverse charge, check before invoicing rather than after.
Common questions
No. It does not apply when the customer is the end user, such as a homeowner, or a business that will use the building itself and has confirmed it is an end user. In those cases the supplier charges VAT normally.
It must show all the normal VAT invoice details, state that the reverse charge applies, for example 'Reverse charge: customer to pay the VAT to HMRC', and show the VAT rate and amount for information, without adding it to the total payable.