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VAT Notice 735

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When is the reverse charge needed on VAT returns?

Reverse charge mechanism

The outcome of the reverse charge is that your customers will account for VAT on your sales instead of your business as the supplier, and vice-versa. In some cases, this acts as an anti-fraud measure, preventing a supplier from charging 20% VAT and then disappearing without declaring tax to HMRC on a return. In other situations, it is an administrative measure, e.g. avoiding the need for lots of overseas suppliers having to register for UK VAT.

Trap. If your business accepts an incorrect VAT charge from a supplier when the reverse charge should apply, HMRC has the power to assess you for the tax you should have accounted for in Box 1 of your return, i.e. as if you had made the reverse charge correctly.

Services purchased from abroad

If you buy services from abroad, you must account for the reverse charge on your returns, based on the VAT rate that applies to the service under UK law, i.e. 20% in most cases. This rule was unaffected by Brexit because it has always applied to services purchased from abroad and not just the EU. You will make return entries as follows:

Box 1 (output tax) - usually at a rate of 20% of the invoice value

Box 4 (input tax) - the same figure as Box 1 unless your business has an input tax restriction with partial exemption, private or non-business issues

Box 6 (outputs) and Box 7 (inputs) - based on the net value of the invoice issued by your overseas supplier

Tip. The Box 6 entry catches out many business owners. The logic here is that you are accounting for VAT that would have been paid by your overseas suppliers if they were registered for UK VAT, i.e. output tax in Box 1 and outputs in Box 6.

Import of goods

If your business imports goods you should elect for postponed VAT accounting for all of your arrivals. This means that you will not be charged VAT by HMRC at the time of import but will carry out a reverse charge calculation on your next return. The return entries for your imports are almost the same as for your purchase of services from abroad. The difference is that you don’t make a Box 6 entry with imported goods.

Anti-fraud measures

If you trade in the following industries, you must be aware that the reverse charge will sometimes apply to your business-to-business sales and purchases:

• building industry - most supplies of labour between VAT-registered builders have been subject to the reverse charge since 1 March 2021
• mobile phones and computer chips - with an invoice/sales value exceeding £5,000 excluding VAT
• wholesale gas and electricity
• emissions allowances
• wholesale telecommunications
• renewable energy certificates.

Tip. HMRC’s VAT Notice 735 (see The next step ) explains when and how the reverse charge applies in each case.

For a link to VAT Notice 735, visit https://www.tips-and-advice.co.uk , Download Zone, year 12, issue 7.