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Reverse VAT, also known as the reverse charge mechanism, is a VAT accounting procedure that shifts the responsibility for reporting VAT from the seller to the buyer. It is used across the EU and the UK to reduce fraud and simplify VAT compliance in specific business-to-business transactions.
This system plays a key role in cross-border trade and selected domestic transactions, particularly in sectors vulnerable to fraud, such as construction, electronics, and telecommunications.
Understanding how and when reverse VAT applies can help businesses avoid penalties, ensure accurate reporting, and manage cash flow more effectively.
What Is Reverse VAT?
Reverse VAT changes who is responsible for charging and reporting VAT. Under normal VAT rules, a supplier charges VAT on their invoice, collects it from the customer, and then remits it to the tax authorities.
With reverse VAT, the supplier issues an invoice without VAT, and the buyer is responsible for calculating, reporting, and paying the VAT directly to the tax authority. The buyer includes both the output VAT (as if they sold the product or service) and input VAT (as if they purchased it) in their VAT return.
In many cases, these cancel out. So, there is no actual payment of VAT unless the buyer is partially exempt or not VAT registered.
This method helps reduce VAT fraud, especially in cross-border situations where enforcement across jurisdictions is difficult.
How Does Reverse VAT Work?
Here’s a breakdown of how the reverse charge mechanism functions:
Normal VAT Process:
- Supplier charges VAT.
- Customer pays the gross amount (including VAT).
- Supplier submits VAT to the tax office.
- Customer reclaims VAT if eligible.
Reverse VAT Process:
- Supplier issues an invoice without VAT.
- Customer calculates the VAT themselves.
- Customer reports VAT as both output and input on their return.
Example:
A business in France sells consultancy services worth €1,000 to a German company. Under the reverse charge system:
- The French supplier invoices €1,000 with no VAT.
- The German buyer calculates 19% VAT (€190).
- They report €190 as output VAT and claim €190 as input VAT (if fully taxable).
- The VAT payment cancels out in practice, but the transaction is visible to tax authorities.
When Does Reverse VAT Apply?
Reverse VAT does not apply to all transactions. It is used in specific cases that are either outlined in EU legislation or country-specific VAT rules.
Cross-Border Transactions within the EU
When businesses trade across EU member states, the reverse charge often applies. If both the supplier and buyer are VAT registered, the supplier issues an invoice without VAT, and the buyer self-accounts in their own country.
This applies to:
- Goods (intra-Community acquisitions)
- Services that fall under the general B2B rule (e.g., consultancy, IT, advertising)
The aim is to simplify VAT reporting and prevent fraud by ensuring VAT is collected in the buyer’s country.
Domestic Reverse Charges
Some EU countries allow or mandate reverse VAT within their own borders under certain conditions. These often apply when:
- The supplier is not established in the country of supply.
- The goods or services are known to be at risk of VAT fraud.
Each member state has its own conditions. For instance:
- In France, the reverse charge can apply even if the customer is not established, as long as they are VAT registered.
- In Belgium, it can apply to any supply of goods where the supplier is not established, and the customer has a permanent establishment.
Reverse VAT in domestic cases is not uniform and businesses need to confirm the rules in the country where the transaction occurs.
Reverse VAT in the UK (Post-Brexit Rules)
Since leaving the EU, the UK has retained and modified aspects of the reverse VAT mechanism. It applies in two main ways:
1. Cross-Border Purchases (Imports from the EU and Beyond)
UK businesses buying services or goods from abroad must use reverse VAT accounting. Instead of paying VAT at customs or being charged by the foreign supplier, they calculate and declare VAT themselves.
This ensures consistency with global practices and maintains control over VAT collection.
2. Domestic Reverse Charge for Construction Services
A major shift occurred in 2020 with the introduction of the Domestic Reverse Charge for Construction Services. This affects transactions between VAT-registered businesses in the construction supply chain.
Instead of receiving VAT from their customers, subcontractors now issue invoices excluding VAT. The contractor then accounts for the VAT themselves.
This is particularly relevant under the Construction Industry Scheme (CIS). Businesses working under CIS must determine if their customer is an end user or another contractor. If it’s an end user (e.g., property developer or building owner), normal VAT rules apply. Otherwise, reverse VAT is used.
Reverse VAT in the Construction Industry (CIS)
The UK construction sector operates under the Construction Industry Scheme (CIS), which has specific rules for VAT. The Domestic Reverse Charge (DRC) for construction came into effect on 1 October 2020.
This rule applies to most B2B construction services. Instead of paying VAT to the supplier, the contractor accounts for the VAT themselves. This removes the risk of suppliers disappearing without passing on collected VAT to HMRC, a common form of fraud in this sector.
Who Is Affected?
- Tier 2 contractors (those who supply services to other contractors) are heavily impacted.
- Tier 1 contractors (those dealing directly with end users) may still charge VAT under normal rules.
- Subcontractors working for other VAT-registered businesses usually fall within the scope of reverse VAT.
Determining End User Status
The reverse charge does not apply when the customer is an end user. An end user is typically:
- A property owner
- A property developer
- A business that will use the building or service without reselling it
Suppliers should obtain written confirmation from commercial clients who are end users. Without this, the assumption is that reverse VAT applies.
Domestic clients (e.g., homeowners) are automatically treated as end users.
Reverse VAT on Specific Goods and Services
Beyond construction and cross-border services, reverse VAT also applies to high-risk goods and regulated industries, often due to past fraud cases.
Examples of Items or Sectors That May Trigger Reverse VAT:
- Mobile phones
- Computer chips
- Natural gas, electricity, and heating
- Greenhouse gas emission allowances
- Raw metals and cereals (in some EU countries)
- Gold and investment metals
Each member state can apply reverse VAT selectively to such goods. These rules are usually backed by specific Articles in the VAT Directive, such as:
- Article 195: Energy supplies
- Article 199: Property-related supplies and anti-fraud measures
- Article 199a: Temporary derogations approved by the EU Council
Businesses trading in these sectors need to review local VAT rules to confirm applicability.
What Services Are NOT Subject to Reverse VAT?
Reverse VAT is not a blanket rule. It does not apply in several scenarios, including:
- Supplies made to end users
- Employment businesses supplying staff (as opposed to construction services)
- Delivery of goods without installation
- Drilling or extracting natural gas or oil
- Professional services such as:
- Architects
- Surveyors
- Landscape designers
- Interior decorators
- Manufacturing or delivering construction components or machinery
Also, reverse VAT generally does not apply if the supplier is based in the same country and the buyer is a consumer or small business not VAT registered.
Understanding these exemptions is vital to avoid misapplying the reverse charge and risking compliance issues.
How to Invoice Under Reverse VAT
If you’re issuing a reverse charge invoice, the layout and content must reflect the special VAT treatment.
Key Requirements:
- Do not charge VAT. The invoice must show only the net amount.
- State the reverse charge applies. Example phrases include:
- “Reverse charge – Customer to pay the VAT to HMRC”
- “Reverse charge: VAT Act 1994 s.55A applies”
- For EU transactions, mention the relevant directive article (e.g., Article 138, 194, 196).
- Include the buyer’s VAT number. This helps prove that the buyer is eligible and registered.
- List VAT at 0%. Treat it like other zero-rated transactions, but with a clear reference to the reverse charge.
Invoices missing these elements may lead to disputes or penalties, especially during VAT audits.
Businesses often update their accounting systems to automatically include reverse VAT notices where applicable. Most modern VAT software supports this feature.
VAT Returns Under Reverse VAT
The accounting treatment differs depending on whether you’re the supplier or the buyer.
Supplier Responsibilities:
- Do not include output VAT in Box 1 of the UK VAT return.
- Include the net sale amount in Box 6 (total sales excluding VAT).
Buyer Responsibilities:
- Include the calculated VAT in both:
- Box 1 (output VAT)
- Box 4 (input VAT, if reclaimable)
- Include the net purchase in Box 7 (total purchases excluding VAT)
This allows the VAT to flow through the system correctly, even though no payment is made to the supplier.
Note: The Cash Accounting Scheme cannot be used for reverse charge transactions because no VAT is paid or received in cash terms.
Businesses impacted by reverse VAT often switch from quarterly to monthly VAT returns if they become net reclaimers. This helps improve cash flow by receiving refunds more frequently.
Estimate Reverse VAT Instantly
Understanding how reverse VAT affects your numbers is easier when you can calculate it yourself.
If you need to know how much VAT you should self-account for or want to model the financial impact of a reverse VAT scenario, try our Reverse VAT Calculator.
This free tool gives you a fast, accurate estimate based on your transaction amount and VAT rate. Whether you’re issuing an invoice or checking how much VAT to include in your return, the calculator can save you time and reduce errors.
Use it to:
- Check what to enter in your VAT return
- Forecast the cash flow impact of reverse VAT
- Verify invoice amounts as a supplier or customer
Bookmark it for regular use — especially useful if you deal with high volumes of construction services or cross-border B2B transactions.
FAQs
What is the main purpose of reverse VAT?
To prevent VAT fraud and make compliance easier in certain scenarios, especially in cross-border B2B transactions and industries prone to abuse like construction and electronics.
Who must apply reverse VAT?
The buyer is responsible for applying reverse VAT when it applies. The supplier issues an invoice without VAT and references the reverse charge. The buyer then reports both output and input VAT on their return.
Can I claim the VAT under the reverse charge?
Yes — if you’re fully VAT registered and the purchase relates to taxable business activity. However, if you are partially exempt or not VAT registered, the input VAT cannot be recovered.
Does reverse VAT apply to all services?
No. Reverse VAT only applies in specific circumstances. For example, it applies to cross-border B2B services within the EU or construction services under UK CIS rules. It does not apply to B2C transactions, end users, or certain professional services like architecture or design.