Reverse charge VAT flips the normal rule: instead of the supplier charging VAT, the customer accounts for it on their own VAT return — declaring the output tax and, usually, reclaiming it as input tax on the same form. For most businesses the net effect is nil, which lulls people into treating it as a technicality. It is not. The reverse charge decides whether foreign suppliers' invoices create UK VAT obligations, whether a subcontractor's invoice should carry VAT at all, and — in one genuinely sharp edge — whether a business with modest UK sales has quietly crossed the registration threshold.
There are two distinct families of reverse charge, routinely confused. Here are both.
Family one: services bought from abroad
Buy B2B services from an overseas supplier — software licences, consultancy, advertising, legal work, SaaS subscriptions — and under the general place-of-supply rule the supply is treated as made in the UK, by you (specific exceptions exist for land-related, admission, passenger transport and a few other service types, which follow their own rules). Per Notice 741A, you account for UK VAT on the price in box 1, reclaim it in box 4 subject to your normal recovery position, and enter the value in both box 6 and box 7 — the one place on the VAT return where a purchase appears in the sales box, and a detail that trips up even experienced bookkeepers.
For a fully taxable business this is a wash. Two situations make it real money or real risk:
- Partial exemption. A business making exempt supplies — financial services, property, healthcare, education — cannot fully reclaim the box 4 entry. The reverse charge then becomes an actual cost, and systematically missing it means systematically underpaying VAT on every foreign invoice. This is a standard, lucrative line of enquiry in VAT inspections of exempt-sector businesses.
- The registration trap. Reverse-charge services you receive count towards your £90,000 registration threshold. An unregistered consultancy with £70,000 of UK fees and £25,000 of overseas software and advertising spend is over the line and does not know it. Anyone near the threshold with meaningful foreign supplier spend should run this check today.
Family two: domestic reverse charges
The UK also reverses the charge on specific home-market supplies — anti-fraud measures aimed at sectors where "charge VAT, vanish, never pay HMRC" carousel schemes flourished. Under Notice 735 the list currently covers: mobile phones and computer chips (above a £5,000 per-invoice de minimis), wholesale gas and electricity, wholesale telecoms, emissions allowances, renewable energy certificates — and, much the biggest in practice, construction services.
The construction version applies to standard and reduced-rated building services supplied between VAT-registered businesses where the payment sits under CIS. The subcontractor invoices without VAT, stating the rate that would apply and wording along HMRC's suggested line — "Reverse charge: VAT Act 1994 Section 55A applies" — and shows only the net value in box 6. The contractor accounts for the VAT in box 1, reclaims in box 4, and records the purchase in box 7.
The pivotal concept is the end user: a business at the top of the chain — receiving construction services for its own use rather than selling them on — can notify the supplier in writing that it is an end user, and normal VAT invoicing resumes. No written notification, no exception: the supplier must apply the reverse charge even to a customer who obviously looks like an end user. Property owners, developers and businesses commissioning their own works get this wrong in both directions, and the standing advice is to deal with end-user status in the contract, once, rather than invoice by invoice.
Why getting it wrong costs the innocent party
The reverse charge's nasty asymmetry is that errors punish whoever received the wrongly-issued invoice. Pay 20% "VAT" to a subcontractor who should have reverse-charged, and you have not paid VAT at all — HMRC can refuse your input tax claim, and your remedy is a credit-note argument with the supplier. Fail to apply the reverse charge on foreign services and the assessment lands on you, with interest — softened where HMRC allows the corresponding input tax in the same assessment, but a real net cost for anyone partially exempt, and either way the most avoidable correction in the whole tax. Cash flow cuts both ways too: subcontractors under the construction charge lose the output VAT they used to hold between invoice and return, which for some is the difference between comfortable and stretched — repayment-trader status and monthly returns are the standard mitigation.
The systems answer
Reverse charges are a mapping problem before they are a tax problem. The businesses that never think about them have set up their software correctly once: supplier records flagged by country and type so foreign services post to a reverse-charge code (boxes 1, 4, 6, 7 automatically); CIS-linked customers and suppliers flagged for the domestic charge with compliant invoice templates; end-user notifications stored with the contracts; and a quarterly reconciliation of reverse-charge postings — the supplier-account totals for flagged overseas and DRC suppliers against the boxes 1 and 4 entries they should have generated. (Note there is no ratio shortcut: reverse-charged services land in box 6 and box 1, so the overall box 1 : box 6 relationship stays ordinary-looking.) Modern platforms handle all of it — but only after someone tells them to.
If any of this reads like news — particularly the threshold point or the partial-exemption exposure — a short review is worth commissioning before an inspector commissions it for you. Our VAT compliance team does exactly this, our international VAT specialists cover the cross-border rules in depth, and construction businesses can take the CIS and VAT questions together via our CIS guide and CIS services.