Not sure what VAT reverse charge is? Don’t worry – it’s a labyrinth, and there’s no shame in being a little confused.
Usually, VAT is charged by a supplier to the next person in a supply chain. The supplier then takes that extra chunk of money and sends it on to HMRC. VAT reverse charge simply removes the middleman, getting the customer to pay VAT to HMRC directly.
Let’s take a closer look at what the VAT reverse charge is, who it applies to, when you have to do it and how you put it through your accounts and VAT return.
What is VAT reverse charge?
In the UK tax system, the VAT reverse charge is a way of shifting the responsibility for reporting VAT shifts from the supplier to the customer.
VAT reverse charge is designed to stop VAT fraud from companies who charge VAT to others, but never pass it on to HMRC directly. It’s also relevant for transactions concerning specific types of goods with high fraud risk.
Here’s an example of the VAT reverse charge
Let’s say a business hires a painter for a B2B service. The painter charges £2000 plus VAT of £400.
With standard VAT rules, the painter (aka the supplier) would invoice the business (aka the customer) the whole amount, including the £400 in VAT.
With the reverse charge VAT, the painter only invoices for the cost of their services and leaves the VAT for the business to give to HMRC directly. The painter must state on their invoice that reverse charge VAT rules apply.
The business would then pay HMRC the £400 directly when they do their own VAT return.
The above is an example of the domestic reverse charge
The domestic reverse charge refers to reverse charge VAT that happens within the UK. It’s a little different to the intra-community or international use of the reverse charge.
Since Brexit, UK VAT laws have changed if you supply or receive B2B goods or services from outside the UK. Make sure you check how you’ll pay VAT on the government website.
Who’s the VAT reverse charge for? Yes, construction industry – we’re looking at you
The VAT reverse charge is designed for businesses or sole traders who are already registered to pay for VAT and provide goods or services to other businesses.
The specified goods that the reverse charge applies to are:
- Mobile phones
- Computer chips
- Wholesale gas
- Wholesale electricity
The specified services that the reverse charge applies to are:
- Construction services
- Emission allowances
- Wholesale telecommunications
- Renewable energy certificates
Not sure if the VAT reverse charge is relevant? It’s useful to think of the difference between a customer in the supply chain and the final consumer.
When one business sells something to another business, that’s their customer, but it’s still not the intended consumer or end user of the product. The VAT reverse charge is only for B2B transactions – not to sales made to the end user.
When does the VAT reverse charge apply?
HMRC loves a list and goes into exacting detail on their website for the specific goods and services the VAT reverse charge applies to within each area.
Here’s an example list of building services the VAT reverse charge applies to within construction services or CIS scheme:
- Decorating or painting the inside or the exterior surfaces of any building or structure
- Site clearance, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works, earth-moving
- Constructing, repairing, altering, demolishing, extending or dismantling buildings or structures, including offshore installation services
- Reservoirs, pipelines, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, restoration painting, extension or restoration
When does the VAT reverse charge NOT apply?
The VAT reverse charge does not apply to:
- Businesses or sole traders that are not VAT-registered
- Any employees and temporary workers your business is responsible for paying
- Zero-rated VAT supplies
- Work done outside of the UK
- End users and intermediary suppliers
In case we didn’t cover it well enough above, an end user is a business or person who used a construction service for themselves. An end user isn’t selling any of those services as part of their business: they’re using the goods or the results of that service for themselves.
Intermediary suppliers are VAT-registered businesses that are closely linked to the end user. They sell goods or services to another person, but without adding anything or altering those goods or services, so there’s no added value to be taxed.
There are also specific exemptions for certain services. Head to HMRC’s VAT domestic reverse charge guidance to check your service.
To carry on with our construction services example, the building services exemptions from the HMRC VAT reverse charge include:
- Drilling for, or extracting, oil or natural gas
- Installing seating, blinds and shutters
- Installing security systems, including burglar alarms, closed circuit television and public address systems
- Making, installing and repairing artworks such as murals, sculptures and other artistic items
- Signwriting and erecting, installing and repairing advertisements and signboards
- Architectural or surveying work, or of building, engineering, interior or exterior decoration and landscape consultants
- Manufacturing components for lighting, air conditioning, ventilation, heating, power supply, drainage, sanitation, water supply or fire protection systems, or delivery of any of these to the site
- Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to the site
- Extracting minerals and tunnelling, boring or construction of underground works for this purpose
To make it a little easier to visualise – if you’re a supplier:
And if you’re a buyer:
For more information on whether you need to adhere to the VAT reverse charge then check out HMRC’s reverse charge technical guide.
How do you calculate reverse charge VAT?
Standard reverse charge VAT is still 20% of the cost of the service or item you’re buying – unless you’re eligible for zero-rated VAT.
Your supplier should only invoice you for the service or item they provided, and then advise you this payment needs the reverse charge VAT applied.
All you need to do to calculate reverse charge VAT is divide the amount of the service or item by 100, and times it by 20. Easy as pie.
How does reverse charge VAT work on VAT returns?
If you’re a supplier, you only need to put the net value of the sale on your tax return in box 6 of your VAT return. You shouldn’t put any output tax on the sale if the VAT was paid through the reverse charge.
Meanwhile, if you’re the customer who paid the reverse charge VAT, you’ll need to record output tax in box 1 of your tax return.
You can then reclaim the reverse charge goods or services via input tax, so long as it adheres to all the usual VAT rules.
How to invoice reverse charge VAT
If you’re a supplier who needs to invoice a customer, you don’t need to charge VAT on their invoice, but you do need to reference the reverse charge.
Show the net amount you’re charging, but refer to VAT as 0%. Add a sentence explaining there’s no VAT charged at this point, but that the domestic reverse charge applies and the customer is required to account for the VAT.
You can then clearly state how much VAT is due, or the rate of VAT if for whatever reason the exact amount cannot be shown. But you must make clear you’re not charging the customer VAT at this moment, and they should not send this money to you.
What information should be included on invoices?
Your invoice must include the reference ‘reverse charge’.
HMRC give the following examples on their website on how that could be worded:
- VAT Act 1994 Section 55A applies
- S55A VATA 94 applies
- Customer to pay the VAT to HMRC
As explained above you should also make clear how much the reverse charge VAT is, and that it is separate from the net amount for your services or goods.
Take a look at a VAT reverse charge invoice example from HMRC’s website.
Does the intra-community use the VAT reverse charge?
When goods or services are dispatched or transported around different Member States of the European Union, that’s the intra-community.
The intra-community tends to tax B2B goods in the country of arrival and use the reverse charge mechanism.
Since the end of December 2020, the UK is no longer a part of the intra-community, and so is no longer subject to this EU VAT Directive. UK VAT-registered businesses now cover post-Brexit import VAT through postponed accounting.
Postponed accounting for VAT is now how UK VAT-registered businesses can cover import VAT post-Brexit.
How does the domestic reverse charge work for non-established suppliers?
A non-established trader is an individual who doesn’t have a fixed place of business within a country. When it comes to the EU, it’s up to each member state whether they’ll impose the reverse charge on non-established suppliers.
Again, as the UK is no longer a part of the European Union since the end of December 2020, it’s no longer subject to this EU VAT Directive. Postponed accounting for VAT is now how UK VAT-registered businesses can cover import VAT post-Brexit.
What actions should my business take?
Your business needs to figure out whether it’s subject to the VAT reverse charge as a customer or a supplier, and what paying VAT in this way would do to your cash flow and procedures.
It’s important to remember the reverse charge is no more or less expensive – it’s just a different administrative process than paying standard VAT. When you pay, your VAT would also change, which may mean less cash flow for some businesses and more for others.
If you think you might be eligible for the reverse charge then consult an accountant to make sure you get your accounts in order.
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