Reverse Charge VAT: What You Need To Know | MHC & Co

Reverse Charge VAT: What You Need To Know

Complete Guide to Domestic Reverse Charge VAT Rules for UK Businesses

MHC & Co VAT Specialists

HMRC estimates that £100 million annually is lost to VAT fraud in the construction sector alone. The Domestic Reverse Charge VAT was introduced to combat missing trader fraud and affects thousands of UK businesses.

What is Reverse Charge VAT?

Reverse Charge VAT is a mechanism where the responsibility for accounting for VAT shifts from the seller to the buyer of goods or services. Instead of the supplier charging VAT, the customer accounts for the VAT directly to HMRC.

The supplier doesn’t charge VAT on their invoice
The customer accounts for both the input and output VAT
Designed to prevent missing trader (VAT) fraud
Applies to specific industries and transactions

When Does Reverse Charge VAT Apply?

The Domestic Reverse Charge applies to the following scenarios:

Sector	Effective Date	Scope	Threshold
Construction Services	1 March 2021	Most construction services	No minimum threshold
Mobile Phones & Computer Chips	1 June 2007	Wholesale supplies	£5,000+ per item
Gas & Electricity	1 July 1994	Wholesale supplies	No minimum threshold
Emissions Allowances	1 November 2010	All emissions allowances	No minimum threshold
Telecommunication Services	1 February 2016	Wholesale roaming services	No minimum threshold

How Reverse Charge VAT Works

Step 1

Supplier issues invoice without VAT

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Step 2

Customer accounts for output VAT on their VAT return

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Step 3

Customer claims input VAT (if eligible) on the same return

Standard VAT vs Reverse Charge VAT

Aspect	Standard VAT	Reverse Charge VAT
VAT charged on invoice	Yes	No
Supplier responsibility	Collect and pay VAT to HMRC	Issue VAT-less invoice with reverse charge notice
Customer responsibility	Pay VAT to supplier	Account for VAT directly to HMRC
Cash flow impact	Supplier holds VAT until payment to HMRC	No cash flow impact for supplier
VAT return entries	Standard entries	Special boxes for reverse charge transactions

Construction Industry Scheme (CIS) and Reverse Charge

Key Rules for Construction

The Domestic Reverse Charge for construction has specific rules:

Applies to standard and reduced-rate VAT services
Includes most construction operations as defined in CIS
Does not apply to zero-rated supplies
Excludes materials supplied separately from construction services
End-user customers are exempt from reverse charge

Practical Examples

Example 1: Construction Services VAT @ 20%

Scenario: Builder Ltd supplies construction services to Developer Co worth £10,000 + VAT

Standard VAT Treatment:
Builder Ltd invoices: £10,000 + £2,000 VAT = £12,000
Builder Ltd pays £2,000 VAT to HMRC

Reverse Charge Treatment:
Builder Ltd invoices: £10,000 (no VAT charged)
Invoice must include: “Reverse charge: Customer to pay VAT to HMRC”
Developer Co accounts for £2,000 output VAT on their VAT return
Developer Co claims £2,000 input VAT (if eligible)
Net VAT effect for Developer Co: £0

Example 2: End User Exemption VAT @ 20%

Scenario: Electrical Contractor supplies services to Homeowner (end user)

Treatment:
Reverse charge does NOT apply to end users
Electrical Contractor charges VAT normally: £5,000 + £1,000 VAT = £6,000
Electrical Contractor pays £1,000 VAT to HMRC

Key point: Suppliers must determine if their customer is an end user or intermediary business.

How to Account for Reverse Charge VAT

Supplier Responsibilities

Issue invoices without VAT
Clearly state that reverse charge applies
Include the wording: “Reverse charge: Customer to account for the VAT to HMRC”
Include all other normal invoice requirements
Keep records of reverse charge transactions

Customer Responsibilities

Account for output VAT in box 1 of VAT return
Include VAT-inclusive value in box 6
Claim input VAT in box 4 (if entitled to reclaim)
Ensure the supply is included in box 7
Maintain records of reverse charge transactions

VAT Return Example for Reverse Charge Transaction:
Box 1: £2,000 (output VAT on reverse charge purchases)
Box 4: £2,000 (input VAT claim on reverse charge purchases)
Box 6: £10,000 (value of reverse charge purchases)
Box 7: £10,000 (value of reverse charge sales)
Net VAT payable: £0 (assuming full input VAT recovery)

Common Mistakes and How to Avoid Them

Mistake	Consequence	Prevention
Supplier charges VAT incorrectly	Customer cannot recover VAT, potential penalties	Verify customer VAT status before invoicing
Missing reverse charge statement	Invoice may be treated as invalid by customer	Use correct wording on all reverse charge invoices
Customer fails to account for VAT	VAT assessment, interest and penalties	Implement processes to identify reverse charge invoices
Incorrect end-user treatment	Potential loss of VAT recovery for customer	Clearly establish customer status before supply
Poor record keeping	Difficulty during HMRC inspections	Maintain separate records for reverse charge transactions

Special Considerations

Mixed Supplies

When a supply includes both reverse charge and standard rated elements, businesses must apportion the value accordingly.

International Aspects

Reverse charge also applies to services received from outside the UK, where the place of supply is the UK.

VAT Groups

Reverse charge does not apply to supplies between members of the same VAT group.

Cash Flow Implications

The reverse charge can significantly impact cash flow:

Suppliers: Positive impact as no VAT is paid to HMRC
Customers: Negative impact if unable to fully recover input VAT
Partial exemption: Businesses that cannot fully recover VAT may face increased VAT costs

Penalties for Non-Compliance

HMRC may issue penalties for errors in applying reverse charge rules:

Incorrect returns: up to 100% of tax due
Failure to notify HMRC of errors
Repeated compliance failures
Potential penalties for both suppliers and customers

Need Help With Reverse Charge VAT?

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