The VAT reverse charge is a mechanism where the customer, rather than the supplier, accounts for the VAT on a transaction directly to HMRC. It commonly applies to certain construction services under the Construction Industry Scheme and to some cross-border supplies of goods and services.
What is the VAT reverse charge?
The VAT reverse charge is a mechanism that shifts the responsibility for accounting for VAT from the supplier to the customer. Instead of the supplier charging VAT on their invoice and paying it to HMRC, the customer records both the output VAT and the corresponding input VAT on their own VAT return.
This means no VAT actually changes hands between the two parties for the affected transaction, but the VAT is still properly accounted for on both sides. It is used by HMRC in specific situations to reduce the risk of VAT fraud and to simplify VAT accounting on certain cross-border or sector-specific transactions.
When does the reverse charge apply?
The reverse charge applies in a number of scenarios. The most common ones that TaxOptimiser users encounter include:
- Services bought from suppliers based outside the UK
- Specified goods and services within the UK where HMRC has introduced sector-specific rules, such as construction services within the scope of the Construction Industry Scheme (CIS)
- Certain wholesale supplies in sectors HMRC considers high-risk for fraud
The rules differ depending on the type of supply, the location of the supplier and customer, and whether both parties are VAT registered. You should always check the specific guidance that applies to your situation before treating a transaction as reverse charge.
Heads up - The reverse charge only applies where both parties are VAT registered (and, for domestic schemes such as construction, where the customer is not an end user). If in doubt, ask your supplier or customer to confirm their status in writing.
How the reverse charge works in practice
When the reverse charge applies to a supply you receive:
- Your supplier issues an invoice without charging VAT
- The invoice should clearly state that the reverse charge applies and show the rate of VAT that would have been charged
- You, as the customer, account for the VAT due as if you had charged it yourself (output tax)
- You can usually reclaim that same VAT as input tax, subject to the normal recovery rules
When the reverse charge applies to a supply you make:
- You do not charge VAT on your invoice
- You must include a note on the invoice explaining that the customer is responsible for accounting for the VAT
- You still report the net value of the sale on your VAT return
Recording reverse charge transactions in TaxOptimiser
TaxOptimiser includes dedicated VAT codes to handle reverse charge transactions correctly on both purchases and sales. Using these codes ensures the relevant boxes on your VAT return are populated automatically.
Recording a purchase under the reverse charge
- Open the Purchases area and create a new bill or expense
- Enter the supplier, date and net amount as shown on the invoice
- Select the appropriate reverse charge VAT code from the tax dropdown
- Save the transaction
TaxOptimiser will automatically calculate the notional VAT and post it to both the output and input VAT sides of your return.
Recording a sale under the reverse charge
- Open the Sales area and create a new invoice
- Add the customer and line items as usual
- Apply the reverse charge VAT code to the relevant lines
- Check that the invoice template includes the required reverse charge wording
- Send the invoice to your customer
What to show on your invoices
If you are the supplier under a reverse charge transaction, your invoice must make it clear that the customer is responsible for accounting for the VAT. Typical wording includes a statement such as "Reverse charge: customer to account for VAT to HMRC" alongside the rate or amount of VAT that would otherwise have applied.
TaxOptimiser includes a default reverse charge note that is added automatically when you apply a reverse charge VAT code to an invoice line. You can edit this wording under Settings > Invoice templates if you need to adapt it.
How reverse charge entries appear on your VAT return
Depending on the type of reverse charge, the figures will flow through to specific boxes on your VAT return. In general:
- The notional output VAT is included in the box for VAT due on sales
- The matching input VAT is included in the box for VAT reclaimed on purchases (subject to recovery rules)
- The net value of the supply is included in the relevant net sales or net purchases box
You can review how each transaction has been treated by opening the VAT return in TaxOptimiser and using the drill-down option on any box to see the underlying entries.
Common pitfalls to avoid
- Charging VAT by mistake - If the reverse charge applies and you still charge VAT, your customer cannot reclaim it as input tax and you may need to issue a credit note and corrected invoice
- Missing invoice wording - Reverse charge invoices must include a clear statement; without it, the invoice may not be valid for VAT purposes
- Treating end users incorrectly - For some domestic schemes, supplies to end users fall outside the reverse charge; make sure you confirm the customer's status
- Using the wrong VAT code - Selecting a standard VAT code instead of the reverse charge code will misstate your VAT return
Heads up - Getting the reverse charge wrong can lead to under- or over-declared VAT, which may trigger HMRC enquiries or penalties. If you are unsure how a transaction should be treated, check with your accountant before submitting your return.
Tips for accountants managing multiple clients
- Use the client dashboard to filter for clients in sectors most affected by reverse charge rules, such as construction or telecoms
- Set up default VAT codes on supplier and customer records where reverse charge consistently applies, to reduce manual entry errors
- Review the VAT return drill-down before submission to confirm reverse charge entries appear in the expected boxes
- Use the audit trail to evidence how each transaction was coded if HMRC raises a query
Further help
For more detailed guidance on specific reverse charge schemes, refer to the relevant HMRC notices and your professional adviser. You can also explore related TaxOptimiser articles on submitting your VAT return, choosing the right VAT code and the Construction Industry Scheme.
If you need further support, contact the TaxOptimiser team via the in-app Help menu and we will be happy to assist.