Reverse charge in a nutshell
Suppliers are normally responsible for accounting for any VAT due on a supply. However, if the services come within the scope of the reverse charge, it is the customer, rather than the supplier who is responsible for accounting for any VAT due.
The customer will self-account for VAT on the value of the supply received. If the services are used in respect of taxable business activities or by a fully taxable customer this VAT is also recoverable as input tax.
Why are these rules important?
If suppliers were required to charge VAT on the supply made the customer would need to submit claims to recover the overseas VAT incurred which can be time consuming. However, if the supplier charges no VAT and the customer self-accounts
for VAT via their return this is more cost efficient and less time consuming.
Also, the use of the reverse charge prevents a distortion of competition as the same amount of VAT will be accounted for on the services regardless of whether the customer uses a UK or overseas service provider.
The UK has also introduced specific anti-avoidance domestic reverse charges, and these are explained below.
What cross border services are liable to the reverse charge?
Only cross border supplies between businesses (B2B) are liable to the reverse charge. Business to consumer supplies (B2C) are not covered by the reverse charge provisions.
In the UK, the scope of the reverse charge extends to most supplies of services provided by non-resident suppliers to UK business customers.
How is VAT accounted for using the reverse charge?
If a UK customer receives a supply of services covered by the reverse charge in the UK, they need to self-account for the VAT due. The customer needs to take the following steps:
- confirm the nature of the services provided
- ascertain the UK VAT treatment of the services received. Confirm whether any of the services are exempt, zero-rated or reduced rated in the UK
- add up the total cost of the services liable to VAT at the standard rate and the reduced rate in the UK (no reverse charge VAT is due on services that are exempt or zero-rated in the UK)
- calculate the VAT due on the services liable to VAT at the standard rate
- calculate the VAT due on services liable to VAT at the reduced rate
- include the VAT amount calculated in steps 4 and 5 in box 1 in the VAT return
- if business is fully taxable or has used the services solely in respect of taxable supplies, include the amount calculated in step 6 in box 4 in the same VAT return
- for businesses that are partly exempt, the amount of recoverable input tax needs to be calculated using the partial exemption method and included in box 4 in the same VAT return.
Are there any anti-avoidance rules?
The UK has introduced a domestic reverse charge in respect of certain supplies of goods and services as an anti-avoidance measure. The UK domestic reverse charge covers business to business supplies of the following:
- mobile phone and computer chips
- wholesale trading in gas and electricity
- trading in carbon emissions
- wholesale trading in electronic communication services
- trading in renewable energy certificates
- supplies of building and construction services (effective 1 March 2021)
UK business customers will be required to self-account for UK VAT using the reverse charge on relevant supplies of the above services. This amount should be included in the UK VAT return using the procedure explained above.