If you are a UK VAT-registered business buying taxable services from an overseas supplier, you normally account for the VAT yourself under the reverse charge, as HMRC’s VAT Return guidance explains. The supplier charges no VAT. You declare output VAT in Box 1, reclaim the matching input VAT in Box 4 if it is recoverable, and report the value in Boxes 6 and 7. We at Price & Accountants handle this routinely.


TL;DR:

  • Check exceptions for land services, transport hire, admissions, and catering, which may be taxed where performed or where the property sits.
  • Enter output VAT in Box 1, eligible input VAT in Box 4, and the sterling supply value in Boxes 6 and 7.
  • Fully taxable businesses usually offset output and input VAT, but partial exemption can leave a real cost when the business cannot reclaim all input tax.
  • Ask the supplier for an invoice without VAT that states the reverse charge, and retain the contract, tax identifiers, location evidence, and sterling calculations.
  • The domestic reverse charge is separate: it covers specified UK to UK supplies, including qualifying construction work, and excludes end users under stated conditions.

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Table of Contents

What is the reverse charge on services and why does HMRC use it?

The reverse charge turns the customer into the person who accounts for the VAT. Instead of the overseas supplier registering in the UK and charging VAT, you treat yourself as if you had supplied the service to yourself, and you declare the tax on your own return. The general business-to-business rule is that the place of supply is where the customer belongs, so a service bought by a UK business is usually a UK supply.

HMRC’s reason is practical. The reverse charge introduction in its manual describes it as an anti-avoidance measure that moves responsibility from the overseas supplier to the UK customer, so VAT on imported services is not lost. It also removes the need for foreign suppliers to register for UK VAT just to sell one service to a UK company.

The accounting effect depends on your VAT position. GOV.UK’s guidance on VAT on services from abroad notes that a fully taxable business generally sees a net-nil result, because the output tax and input tax cancel out. A partly exempt business can face a real cash cost, because it may not be able to reclaim all of the input tax the charge creates. We come back to that in the pitfalls section.

VAT recovery comparison for taxable and exempt businesses

How do you check whether the reverse charge applies to an overseas service?

Work through these checks in order. If every answer is yes, the reverse charge is almost certainly in play.

Then check the exceptions. Under VAT Notice 741A on place of supply, some services are taxed where they are performed or where the land sits, including land and property services, hiring out means of transport and certain admissions or catering. Use and enjoyment rules can also shift the outcome. For these, the reverse charge may not apply at all.

Keep evidence on file: the supplier’s VAT or tax number, the contract, the invoice and any correspondence showing where the service was supplied and who the customer was.

When does the domestic reverse charge apply instead?

The domestic reverse charge is a different mechanism. It applies when both supplier and customer belong in the UK, and it targets specified sectors where VAT fraud has been a problem. VAT Notice 735 sets out the categories and conditions. The main ones are:

The differences from the cross-border charge matter. Both parties must be UK-based, end users and some intermediary suppliers are excluded, and certain goods only qualify above a minimum value. The supplier must also confirm that the customer is VAT registered and, for some categories, obtain the customer’s VAT number before deciding not to charge VAT. The technical guide on the domestic reverse charge explains how the rules apply to construction supplies.

For a short definition of each, our glossary has entries on the VAT domestic reverse charge and on reverse charge VAT.

How do you report reverse charge services on your VAT return?

The mechanics are the same every time. For a normal cross-border service:

  1. Work out the value of the supply in sterling.
  2. Calculate VAT at the rate that would apply to a UK supply of that service.
  3. Enter that VAT in Box 1 as output tax.
  4. Enter the same VAT in Box 4 as input tax, if you are entitled to recover it.
  5. Include the net value in Box 6 and Box 7.

HMRC’s VAT Notice 700/12 confirms that cross-border services use Boxes 1, 4, 6 and 7, while specified goods and services under the domestic charge are reported differently, with the supplier using Box 6 and the customer using Boxes 1, 4 and 7. Our glossary page on the VAT return explains each box.

Valuation needs care. According to HMRC’s valuation manual, you take the total consideration, including any taxes levied abroad and any non-monetary consideration, and convert it into sterling. Where a payment is made in a foreign currency, our glossary entry on import VAT covers related conversion issues.

Timing follows the time-of-supply rules. HMRC’s manual on reverse charge tax points sets different tax points for single supplies, prepayments and continuous supplies, with a compulsory tax point at 31 December if no earlier one arises. Pay close attention to which VAT return period the entry belongs in, as getting it wrong shifts the tax between periods.

What should an invoice say, and what records should you keep?

The supplier should not charge VAT where the reverse charge applies. HMRC’s manual on specified goods and services states that the purchaser accounts for the VAT, keeps the normal right to recover input tax, and that invoices must carry a reference to the reverse charge. In practice, wording such as “Reverse charge: customer to account for VAT to HMRC” does the job, alongside the supplier’s VAT number. HMRC’s community guidance on invoices for imported services points the same way.

Keep the following in your records:

Pro Tip: If a supplier leaves off the reverse charge wording, ask for a corrected invoice rather than relying on your own note. It is far easier to fix at the start than during an HMRC enquiry.

What are the cashflow effects and common mistakes?

Partial exemption is the biggest practical trap. If your business makes exempt supplies and cannot recover all its input tax, the reverse charge creates a genuine cost, as GOV.UK’s guidance explains. Check your partial exemption method and the apportionment before you assume the effect is nil.

Onward sales and group supplies also need thought. A service you buy under the reverse charge and then resell is treated according to its own place of supply, and HMRC’s worked example in the reverse charge manual shows how chains of supplies still produce a nil net effect for fully taxable businesses.

The errors we see most often:

Our four-step checklist for reverse charge services

We use the same four steps with tech and fintech clients, and our blog post on four-step reverse charge accounting for services expands them with worked examples.

  1. Confirm the place of supply is the UK and the supplier belongs outside the UK.
  2. Check that your business is VAT registered and that the supply is taxable.
  3. Make sure the invoice carries the reverse charge statement, and file the supporting evidence.
  4. Make the correct entries in Boxes 1, 4, 6 and 7, then review the partial exemption impact.

Pro Tip: Set up a recurring journal or bill rule in your accounting software for regular overseas suppliers, so the reverse charge entries post the same way every period.

Why we treat reverse charge VAT as a routine health check

We spend a lot of time with start-ups and growing tech and fintech companies that buy software, hosting, advertising and professional services from suppliers abroad. In our experience the reverse charge is rarely hard in theory. It goes wrong when bills arrive in several currencies, when the supplier’s invoice is vague, or when nobody owns the quarterly review. Our view is that regular VAT health checks and a clear cloud accounting set-up in Xero can help reduce these errors. If you would like us to look at how your business handles these entries, ask us for a VAT compliance review.

— Rahamut

How we can help with your reverse charge VAT

We look after VAT and business compliance for UK tech and fintech SMEs, from checking whether the reverse charge applies to each overseas supplier to preparing the return itself. Our bookkeeping and cloud accounting work means the entries are made correctly as the bills come in, and our advisory support covers partial exemption and group questions as your business grows.

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If you want a second pair of eyes on your current treatment, request a VAT check or a bookkeeping review through our services page, or see how our plans are set out on our pricing page, where Core Services is £249 per month and the Blue Plan is £549 per month.

FAQ

What do I put on my invoice for VAT reverse charge?

Add a clear statement such as “Reverse charge: customer to account for VAT to HMRC”. No VAT is charged on the invoice. The HMRC manual on specified goods and services says invoices must carry a reverse charge reference.

Can I reverse charge VAT in Germany?

That depends on German VAT rules, which are outside what we cover here. For a UK business, the UK reverse charge applies when the place of supply is the UK and the supplier belongs overseas. For German rules, check the German tax authority or a local adviser.

What is the reverse charge mechanism in VAT?

It is a way of collecting VAT where the customer, not the supplier, accounts for the tax. The customer declares output VAT and, if entitled, reclaims input VAT on the same return. VAT Notice 741A shows how it applies to cross-border business services.

Do I have to charge VAT on services to overseas customers in the UK?

It depends on where the customer belongs and what the service is. For most B2B services supplied to a business customer outside the UK, the place of supply is overseas and you do not charge UK VAT. Keep evidence of the customer’s location and status, as business.gov.uk advises.