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Reverse Charge VAT Explained

Reverse charge VAT simplifies the way businesses account for VAT on services between the UK and other EU countries. It only applies when both businesses involved in the transaction are registered for VAT.

The rules of VAT reverse charge on applies to services and the rules remain the same post Brexit on 1 January 2021. You need to follow different rules for the export of products.

Updated 18 August 2021

1. What is the VAT Reverse Charge Scheme?

When a UK VAT registered business supplies services to an EC member state, then the UK business would normally be required to register for VAT in that country – that is a lot of administration.  To try and simplify things, as well as encourage trade across the EU, using reverse charge means a UK business:

  • does not need to register for the VAT of the member state it is supplying services and;
  • does not need to charge VAT on their invoice.

2. Who Can Use VAT Reverse Charge

The businesses involved and service being supplied must meet the following criteria:

  • 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
  • both businesses are VAT registered in their own countries

3. Information to Include 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’. If you are using Xero then the VAT code to choose is “Zero Rated EC Services”, that way the transaction will be accounted for correctly on the VAT return.

4. How to Show 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.