Under normal UK VAT rules, the supplier of goods or services must account for VAT due. However, in some circumstances, it is the customer who must instead self-charge VAT due under the ‘reverse charge’ rules.
Introduced in 1993, the VAT reverse charge began as a tax equalisation measure to ensure it isn’t cheaper to buy services from businesses overseas – who wouldn’t charge UK VAT – than domestic businesses, according to BDO VAT partner Glyn Woodhouse.
Kevin Hall, VAT partner at Wright Hassall, adds: “It might be helpful to think of the reverse charge as the purchaser selling to itself, charging VAT to itself – it is a UK customer after all – then also recovering that VAT as usual.”
How it works
Generally, the reverse charge applies when a VAT-registered person buys in a service subject to the reduced or standard rate of VAT, from an overseas business, and the place of supply is the UK. The charge enables suppliers to avoid the requirement to register for VAT in other countries, “and enables tax authorities – like HMRC – to defend against VAT fraud” by requiring the purchaser to pay the VAT direct to the tax authorities, Kevin Hall explains. Where it applies, the customer accounts for the VAT as output tax on their VAT return for the period and, subject to the normal rules on VAT recovery, may be entitled to recover this VAT as input tax on the same return.
“A UK VAT-registered person needs to treat the purchase as if it were both supplied by and supplied to the business, with output VAT chargeable and input VAT recoverable in the same VAT return,” explains Glyn Woodhouse. “The actual supplier does not charge any VAT on its invoice, but the purchaser is put in the same position as if it had.”
International and domestic reverse charge
Additionally, there are some supplies to which the reverse charge applies between a UK supplier and a UK customer to stop VAT loss in particular sectors, e.g. the sale of wholesale energy or mobile phones.
“This shifts the responsibility for accounting for the output VAT from the supplier to the customer,” explains Woodhouse. This domestic reverse charge also applies to computer chips/CPUs, wholesale supplies of telecoms, trading in emissions allowances, renewable energy certificates i.e. goods and services identified by HMRC at particular risk of missing trader fraud.
Sarah Halsted, VAT technical associate director at RSM, says the other main type of reverse charge: the ‘international’ reverse charge – applying to services supplied by a person outside the UK to a UK business recipient – applies to a range of offerings including professional services, consultancy, computer software and supplies of intellectual property rights. If the recipient is a VAT-registered business, the reverse charge also applies to special rule services including land-related services, restaurant and catering services, admission to events and passenger transport. If the UK recipient is not VAT-registered, she adds, then the overseas supplier of the service may be liable to register for VAT in the UK to account for VAT on the supplies.
Construction supplies
Over the years, the reverse charge has expanded, Kevin Hall says, “applying to more and more supplies and with new rules being implemented – for some supplies but not others”. As well as the categories subject to the antiavoidance domestic reverse charge rules being “gradually broadened as fraudsters targeted more industries”, he adds. Since Brexit, imported goods purchased from non-UK sellers are subject to another reverse charge in respect of consignments valued at £135 or less.
However, Sarah Halsted says that while there have been modifications to the legislation, Brexit “has not significantly changed the practical scope of the reverse charge on international services”. Instead, the most significant change in recent years has been the extension of the domestic reverse charge to certain construction supplies.
“Since 1 April 2021, this has applied to most supplies of construction services between contractors and sub-contractors, but not on the supply to the end user,” Halsted explains. “The complexities surrounding this new reverse charge brings difficulties to operators in the construction sector.”
What to be aware of
Businesses should bear in mind that “the reverse charge is not optional – if they receive supplies deemed to be subject to the reverse charge, then the reverse charge rules must be applied”, Halsted says. “The most common error is where a business overlooks a requirement to account for VAT as a reverse charge on a supply it has received. For entities not entitled to recover all VAT incurred on costs as input tax, a reverse charge may create an irrecoverable VAT liability.”
Finally, purchase of overseas services subject to the reverse charge counts towards the VAT threshold of £85,000, notes Glyn Woodhouse. If a business sells £70,000 of goods and buys in marketing from the EU worth £20,000 in a year, it will have breached the threshold and will need to VAT-register.
This article first appeared in Financial Accountant March/April 2023.
