What is reverse charge VAT?
Reverse charge VAT is a mechanism that shifts responsibility for accounting for VAT from the supplier to the customer. Instead of the supplier charging VAT on an invoice, the customer self-accounts for both the output VAT and, where they are fully taxable, the corresponding input VAT on the same VAT Return. It is commonly used for certain cross-border services and for specific UK sectors, such as construction services under the domestic reverse charge for building and construction.
Why does reverse charge VAT exist?
The reverse charge is primarily an anti-fraud measure. In sectors that have seen significant VAT fraud, such as construction and certain electronic goods, HMRC removes the opportunity for a supplier to charge VAT and then disappear without paying it to HMRC. By making the customer account for VAT directly, the risk of missing trader fraud is reduced. It also simplifies cross-border transactions by avoiding the need for suppliers to register for VAT in every country where they have customers.
How to report reverse charge VAT
A business receiving reverse charge supplies must declare the VAT as both output VAT and, subject to normal input VAT recovery rules, input VAT on the same VAT Return. This usually has a neutral cash effect where the business is fully taxable, but it still affects the figures reported in boxes on the VAT Return and must be recorded correctly in accounting software. Getting this wrong is a common area of error under Making Tax Digital, so specialist software support may be needed.
Related terms: VAT, Output VAT, Input VAT, VAT Return
VAT rules depend on the nature of transactions and individual circumstances. This glossary provides general information and is not personalised tax advice.