Why is my VAT return showing reverse charge?

If you have submitted your VAT return and noticed that it is showing a reverse charge, there could be a few reasons for this. A reverse charge in VAT occurs when the recipient of a supply accounts for the VAT instead of the supplier. This typically happens in certain circumstances when services or goods are supplied between VAT registered businesses.

What is a reverse charge?

A reverse charge means the recipient of goods or services must account for the VAT on that supply, rather than the supplier. This applies in specific circumstances set out in VAT law.

For example, if you receive construction services from another VAT-registered business, you must account for the VAT on those services on your VAT return through the reverse charge. The supplier does not charge VAT on their invoice.

The reverse charge aims to combat missing trader fraud or VAT fraud, where a business charges VAT but does not properly account for it to HMRC. Applying the reverse charge means the recipient accounts for the VAT, so the VAT makes it to HMRC even if the supplier defaults.

When does a reverse charge occur?

The main situations where a reverse charge applies are:

• Receiving building and construction services from another VAT-registered business
• Receiving supplies of certain commodities like mobile phones, computer chips, emissions allowances, etc above a set threshold
• Receiving services from abroad where the place of supply is in the UK
• Receiving scrap metals supplied by another VAT-registered business
• Receiving supplies between connected parties, e.g. between linked companies

There are several other specialist reverse charge supplies detailed in VAT law. But in most cases, a reverse charge applies to VAT-registered businesses when they receive specified supplies from other VAT-registered suppliers.

How does the reverse charge work?

When a reverse charge applies, the supplier issues a VAT invoice indicating the supplies are subject to a reverse charge, i.e. with 0% VAT.

The recipient then accounts for the VAT in their own VAT records. They do this by entering the VAT amount as both output and input tax on their VAT return.

For example:

• A construction firm completes £10,000 of building work for a VAT-registered client
• The construction firm issues an invoice without VAT, stating ‘Reverse charge: VAT to be accounted for by the recipient’
• The client accounts for £2,000 VAT (20% x £10,000) as output tax and input tax in their next VAT return

So the VAT is declared and collected by HMRC, without the supplier charging and accounting for it. The overall effect is the supplier’s sale is treated as outside the scope of VAT.

Why does my VAT return show a reverse charge?

If your business’ VAT return includes a reverse charge, some reasons could be:

You received building or construction services

Construction services are subject to a reverse charge if the supplier is also VAT-registered. Typical services include building, electrical, plumbing, demolition, site preparation and construction consultancy.

The reverse charge applies if payments exceed the VAT registration threshold over a 12 month period.

You received goods on the reverse charge commodities list

Certain goods have additional reverse charge rules if they exceed a set threshold. These include mobile phones, computer chips, emissions allowances, gas and electricity certificates and other similar supplies.

You received services from overseas

If your business imports services from a supplier outside the UK, you may need to account for the VAT under a reverse charge. This applies if the place of supply is treated as within the UK.

You received scrap metals

Scrap metal supplies between VAT-registered businesses are subject to a reverse charge.

You received services from a connected party

Supplies between connected companies, e.g. companies under common control or part of the same VAT group, can trigger a reverse charge.

You received other specialist reverse charge supplies

Less common reverse charges apply in certain sectors like the travel industry and gas and electricity suppliers.

How to account for reverse charge VAT

Where a supply you receive is subject to a reverse charge, you must account for the VAT in your VAT return or Flat Rate Scheme VAT return.

Follow these steps:

1. When you receive the VAT invoice, check if reverse charge applies
2. Do not pay the VAT amount to the supplier
3. Ensure the supply is included in your business records
4. Enter the net value of the supply excluding VAT as a purchase
5. Calculate the VAT due at the appropriate rate, e.g. 20%
6. Enter this VAT amount as output tax and input tax in your next VAT return

This way, the VAT is properly accounted for in your own VAT records and gets reported to HMRC.

Common problems with reverse charges

Some issues to look out for with reverse charges in your VAT return:

• Forgetting to account for the VAT – make sure you include reverse charge supplies in your VAT calculations
• Entering the VAT as input tax only, not output tax – you must show it as both output and input tax
• Paying the VAT to suppliers – don’t pay the VAT under a reverse charge
• Not getting proper invoices – make sure suppliers issue reverse charge invoices
• Not checking invoices for reverse charges at purchase

Following the correct reverse charge accounting practices will ensure your VAT returns are accurate.

Conclusion

A VAT reverse charge means the recipient, rather than the supplier, accounts for the VAT on certain supplies. This is an anti-fraud measure applied in specified circumstances.

If your VAT return shows a reverse charge, it likely means your business received services or goods requiring you to account for the VAT under the reverse charge rules.

The main causes are receiving construction services, goods on the reverse charge list, services from overseas or connected parties. But a range of specialist reverse charges can apply.

Make sure to follow the correct accounting procedure when the reverse charge applies to your purchases. This will ensure your VAT returns and tax position are correct.

Example reverse charge calculations

Let’s look at some examples of accounting for VAT under the reverse charge:

Example 1

• Builder invoices £12,000 for construction work
• Builder’s invoice states ‘Reverse charge: VAT to be accounted for by recipient’
• Recipient calculates VAT as £12,000 x 20% = £2,400
• In next VAT return:
  • Output Tax = £2,400
  • Input Tax = £2,400

Example 2

• Overseas consultant invoices £5,000 for UK services
• Recipient calculates VAT as £5,000 x 20% = £1,000
• In next VAT return:
  • Output Tax = £1,000
  • Input Tax = £1,000

Example 3

• Connected company invoices £8,500 for services
• Connected company issues reverse charge invoice
• Recipient calculates VAT as £8,500 x 20% = £1,700
• In next VAT return:
  • Output Tax = £1,700
  • Input Tax = £1,700

This shows the principle of declaring output tax and input tax at the same amounts under the reverse charge in your VAT return.