The VAT Reverse Charge simplifies the VAT process where services are supplied between the UK and other EU countries. The reverse charge rules generally cover B2B transactions across EU member states.
When a UK VAT registered business supplies a service to another member state, then the UK business would normally be required to register for VAT in that country – that is a lot of administrative burden. To try and simplify this, as well as encourage trade across the EU, the UK business does not need to register for the VAT of the member state it is supplying.
If a UK business supplies another UK business with the same service, VAT would be added by the supplier and reclaimed by the customer. This is because VAT is a levy on the final consumer not businesses. So the VAT reverse charge procedure exists to reflect this same sentiment but across the different VAT rules of the countries involved i.e: a nil effect to both the UK supplier and the EU member state customer.
Here are the steps to showing the Reverse VAT charge on the VAT Returns.
What Information to Show on the UK Sales Invoice
A UK sales invoice should be raised as normal however no VAT needs to be added. Instead the invoice should state ‘the supply is subject to the reverse charge’.
How to Account for the VAT Reverse Charge on the VAT Return
Once the invoice is raised the amount of VAT that would normally have been added should be credited to the VAT account. Then, to remove this liability, a debit entry should be made with the amount of input tax entitled to.
You then include in the relevant boxes of your VAT return:
- the amount of output tax in box 1 (VAT due on sales)
- the amount of input tax in box 4 (VAT reclaimed on purchases)
- the full value of the supply in box 6 (total value of sales)
- the full value of the supply in box 7 (total value of purchases)
The customer in the EU member state will account for the VAT reverse charge in the similar way, using the VAT that would be applicable in their member state.
Where the Reverse Charge Applies
- the place of supply is the UK
- the supplier belongs outside the UK
- you belong in the UK
- the supply is not exempt (this includes exempt supplies subject to an option to tax)
- for supplies not within the general rule, you’re VAT registered in the UK
New Here? Learn how to set up the financial side of your business with these easy to understand guides and resources:
- Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
- Tax Records and Bookkeeping – Understand what tax records you’ll need to keep and how to set up your own bookkeeping system;
- Self Employment Taxes Explained – Learn what taxes you’ll pay, how much and when;
- VAT Guides – From registration to de-registration, VAT schemes and thresholds, these guides will take you through the basics every UK small business owner needs to know;
- Invoice Template – Free template and step-by-step guide so you can get paid by your clients.