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Introduction

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Reverse Charge VAT, means that the customer (Business Customers) is accountable for paying the output VAT (VAT on Sales) in relation to a suppliers invoice for services.

 

There are two aspects of reverse charge VAT as follows:

• International 

• Domestic

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International

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Applies to both sales and purchases of services (outputs and Inputs). 

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Reverse Charges Applied to Sales / Outputs

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Where a UK supplier supplies services to a non UK customer where the services would normally be subject to VAT in the UK,  the supplier would not include UK VAT on their invoice to the customer as the supply is outside the scope of UK VAT.  Instead the supplier would write the words "reverse charge applies" on the invoice and as such this would inform the customer that they may be required to self account for VAT in their local jurisdiction.  So for example a UK consultancy firm invoicing a business customer in France where the French customer would have to pay French Reverse Charge VAT on the total value of the invoice to the French Tax Authorities.    

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Reverse Charges Applied to Purchases / Inputs

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Where a UK business purchases services from a non UK supplier primarily to be consumed in the UK, they will have to self account for reverse charge VAT at 20% to HMRC based on the total value of the invoice from the non UK supplier.  The main purpose here is to ensure UK businesses who purchase from UK suppliers are not placed at a disadvantage to businesses who could source services from non UK suppliers and save 20% UK VAT. 

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How it works - The UK VAT Registered business customer will have to include 20% VAT applied to the total value of the overseas invoice on their VAT return in Box 1 (VAT Payable).  For example if a business seeks legal advice from a supplier based in France and the total value of the invoice is £1,000, then the UK business customer will have to self account and pay £200 output VAT to HMRC.  However the UK business customer will be able to recover all or some of this VAT from HMRC and can either put the same VAT figure as in Box1 in box 4 (Input VAT Recoverable) on their VAT return or a portion of the VAT based on a specific percentage they are allowed to recover.  If the business only makes taxable supplies to their customers, then they will be able to recover the reverse charge payable to HMRC in full and as such the effect would be a nill payment to HMRC as amounts in box 1 (VAT Payable) will equal box 4 (VAT Recoverable) on their VAT return.  Where the purchaser is a partial exempt business (see how VAT works button), it will only be able  to recover a portion of the reverse charge VAT from HMRC depending on the purchasing businesses Partial Exemption Recovery Rate.   

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Note: most services purchased from non UK suppliers by UK VAT Registered business suppliers will be in scope of reverse charges unless they are: 

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• Property related (Land and Buildings) transactions including hotel bills for non UK stay

• Admission to non UK events

• Transport related such as taxis while travelling on business abroad. 

• Services that would normally be Exempt in the UK like Financial Services such as insurance, the purchase of shares.

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Services purchased from non UK suppliers such as the ones below will all be Reverse Chargeable in the UK

• Accountancy Services

• Consultancy Services

• Legal Services

• Supply of staff or contractors

• Advertising

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Domestic

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Domestic reverse charge is similar to International Reverse Charges in that the customer is required to self account for VAT.  The difference is that domestic reverse charges applies to specified transactions between UK to UK businesses.  The main aim here is to prevent / reduce, eliminate fraudulent traders who set up companies, issue VAT invoices for goods and collect the VAT and fail to declare this to HMRC.  (Basically the responsibility for paying output VAT is switched from the supplier to the customer) 

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How it works - Invoices issued by VAT registered UK Business Suppliers to VAT registered UK Business Customers will show the net amounts only and no VAT applied.  On receipt of these invoices for services, the UK business customer will self account for VAT at 20%.  The customer will be responsible for paying this VAT to HMRC and if they only make taxable supplies in their business, they will be able to recover this VAT and in effect there will be a nil payment due to HMRC.  So box 5 VAT payable / recoverable will be zero. 

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For Example - if a UK subcontractor in the construction industry invoices its main UK contractor for services which are covered by the Construction Industry Scheme, for £100,000 then their invoice to the contractor will only show £100,000 and carry the words "reverse charge applies".  The UK subcontractors VAT return will only include £100,000 sales in box 6 on their VAT return. 

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The UK contractor will then have to self account for £20,000 of Output VAT on their VAT return under the CIS reverse charge VAT procedure by including this amount in Box 1 (VAT payable) on their VAT return.  Additionally the contractor (if they only make taxable supplies (standard and zero rated supplies) can recover this £20,000 from HMRC by including the amount in Box 4 on their return. This means their box 5 payable amount will be zero. 

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However the UK contractor will also need to include the net amounts £100,000 in both Box 6 & 7 on their VAT return. 

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Than Following Services are in scope of UK Domestic Reverse Charges:

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• Mobile Phones 

• Computer Chips

• Wholesale Gas and Electricity (not Gas and Electricity to retail consumers)

• Wholesale Telecommunication Services

• Construction Industry (Construction Industry Scheme Contactors)

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For more information please read:

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Domestic reverse charge procedure (VAT Notice 735)

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