Glossary

VAT reverse charge

Krishna Prasad Dahal, Chartered Accountant

Reviewed by Krishna Prasad Dahal FCCA, ACA (ICAEW), FCA (ICAI India)ICAEW Council Member · Last reviewed

Definition

The VAT reverse charge is a rule that makes the customer, not the supplier, account for VAT on certain supplies. The customer records the VAT as output tax on its own VAT return and, where allowed, reclaims the same amount as input tax. In the UK it applies mainly to business services bought from overseas suppliers and, since 1 March 2021, to many building and construction services.

Services from overseas suppliers

When a UK VAT-registered business buys most business-to-business services, such as legal advice or bespoke software, from a supplier belonging outside the UK, the UK business accounts for the VAT under the reverse charge. A business that can reclaim all its input VAT ends up with no net cost.

The domestic reverse charge for construction

The domestic reverse charge applies to building and construction services when:

  • the supplier and customer are both VAT-registered in the UK
  • the payment is reported under the Construction Industry Scheme
  • the service is standard or reduced rated
  • the customer has not confirmed in writing that it is an end user or intermediary supplier

The subcontractor’s invoice states that the reverse charge applies rather than charging VAT, and the contractor accounts for the VAT. SmartFiling’s MTD VAT return service prepares and files VAT returns for VAT-registered businesses.

Related questions

  • What is CIS, and do I need to register? Contractors paying subcontractors for construction work must register, and registered subcontractors suffer 20% deductions instead of 30%; see how to register for CIS.
  • Does the reverse charge apply to work for homeowners? No. A builder working directly for a homeowner charges VAT normally, although its own subcontractors may still use the reverse charge.

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