Accounting technology / Glossary / VAT reverse charge

What is the VAT reverse charge?

Definition

The VAT reverse charge is a rule that moves responsibility for accounting for VAT from the seller to the business buyer. The seller invoices without VAT; the buyer records both the VAT due on the purchase and, if entitled, the same amount as reclaimable input VAT on its own return, so in most cases no cash changes hands.

Also calledreverse chargereverse charge mechanismself-assessment of VAT

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Who accounts for VAT: The business buyer
Main use: Cross-border B2B services
UK construction: Since 1 March 2021

How the VAT reverse charge works

The most common case is business-to-business services across borders. When a business sells services to a business customer in another EU country, it usually does not charge VAT; the customer declares the VAT at its own country's rate through the reverse charge and normally deducts it on the same return. Intra-EU purchases of goods by VAT-registered businesses work in a similar way, as acquisition VAT. Countries also use domestic reverse charges in sectors exposed to fraud, such as some electronics, emissions allowances and construction. In the UK, a domestic reverse charge has applied since 1 March 2021 to building and construction services between VAT-registered businesses that are reported under the Construction Industry Scheme. Invoices must state that the reverse charge applies, and software needs a separate tax code so the amounts land in the right boxes of the return.

Common questions

Does the reverse charge mean no VAT is paid?+

No. The VAT is still due, but the buyer declares it instead of the seller. A buyer with full recovery rights reclaims the same amount on the same return, so the net cost is usually nil.

What should a reverse charge invoice show?+

The supplier's and customer's VAT numbers, the net amount with no VAT charged, and a statement that the reverse charge applies, so the customer knows to account for the VAT.

Does the reverse charge apply to sales to consumers?+

No. It applies only when the customer is a business. Sales of digital services to consumers in other EU countries are taxed where the consumer is, usually declared through the One-Stop Shop.