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VAT reverse charge: Everything you need to know about who pays HMRC that 20%

There’s no shame in not immediately understanding the labyrinth of reverse charge VAT.

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 is simply removing the middle man, and getting the customer to pay VAT to HMRC directly. It’s designed to stop fraud from companies who charge VAT to others but never pass it on to HMRC.

Let’s take a closer look at who the VAT reverse charge applies to, when you have to do it and how you put it through your accounts and VAT return.

(If you’re bamboozled by VAT in general, why not read our guide on VAT accounting to get started!)

And what better way to start than with some real-world examples?

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. So make sure you check how you’ll pay VAT on the government website

Who is the VAT reverse charge for? (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:

  • emission allowances 
  • wholesale telecommunications 
  • renewable energy certificates 
  • construction services 

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.

When does the VAT reverse charge apply?

HMRC love a list and go into exacting detail on their website for the specific goods and services the reverse VAT reverse charge applies to within each area.

Since you asked so nicely, here’s an example list of building services the VAT reverse charge does apply to within construction services or CIS scheme:

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 you were wondering, 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 a service or goods to another person, but without adding anything or altering that service or good, 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:

If you’re a supplier:

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 the reduced rate or 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 then 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 then you do 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.

The UK is no longer a part of the Intra-Community since the end of December 2020, so is 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. 

How does the domestic reverse charge work for non-established suppliers?

A non-established trader is an individual who does not 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, since the UK is no longer a part of the European Union since the end of December 2020, it  is 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, it 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.

Pleo can help you keep track of your VAT

Our automated invoice software keeps helps you retain all the evidence you need to pay VAT or show that you’ve accurately reversed it. You can even integrate it with your accounting system of choice, from Sage to Quickbooks. 

Pretty cool? We think so too. 

Try automating your invoices with Pleo today.

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