The subject of reverse charges is one of the most common search terms when it comes to VAT. It’s a very important procedure as it ensures that VAT is paid to HMRC on the sale of various goods and services business to business, usually those of high value or where there is an obvious risk that the VAT won’t be paid to HMRC.
That all sounds like proper VATspeak. But what does it mean in practice?
There are 2 main categories of business where the reverse charge applies; the first is certain transactions in the UK and the second is certain purchases of imported services by UK businesses.
UK businesses
A really good example is the reverse charge that applies to services and goods under the Construction Industry Scheme (“CIS”).
Many of you will be familiar with the CIS, which applies to construction services supplied by subcontractors to main contractors. The CIS requires the main contractor to pay the income tax directly to HMRC. The procedure has existed for many years and is a very efficient way of ensuring that the tax is paid to HMRC.
In 2020, the CIS was extended to include construction services. HMRC’s explains when the CIS in VAT Notice 735 https://tinyurl.com/225h6f8a with detailed guidance about how to apply the rules here https://tinyurl.com/ypkwn2xv.
However, in practice, the scheme is very logical and simple to apply. Let’s take an example of a VAT registered subcontractor supplying construction services, charging £1,500 each month under a long term contract.
Under normal VAT accounting rules, the subcontractor issues a VAT invoice for the value of £1,500 plus 20% VAT of £300. The £300 would be included as output tax on the sub-contractor’s VAT return and paid to HMRC along with VAT on other sales of service and goods and to claim VAT on purchases and expenses.
Other UK supplies that are liable to the revers charge are listed in VAT Notice 735
- mobile phones
- computer chips
- wholesale gas
- wholesale electricity
- emission allowances
- wholesale telecommunications
- renewable energy certificates
Reverse charge on imported services
The other types of transactions that are subject to reverse charges are imported services purchased by UK businesses. Think about it this way: most banks and insurance companies can’t claim VAT on their costs, so an easy way of saving 20% VAT would be to purchase those services from a non-UK supplier. The reverse charge was therefore designed to prevent this.
The procedure is the same as explained above for UK services that are subject to the reverse charge. The rules are explained in more detail in VAT Notice 741A: Place of supply of services section 5: https://tinyurl.com/mutu768f.
Northern Ireland rules
There are very specific rules for sales of certain goods and services in Northern Ireland, similar in some case to the reverse charge rule. I won’t discuss those here, but the detailed rules are in the following VAT Notice https://tinyurl.com/y5f478kd.
Otherwise, the reverse charge is an anti-avoidance mechanism that has to be paid on certain purchases of services by certain UK businesses. You can find out if it may apply to your business by checking out the links to the HMRC guidance above.
If you would like some help on this within your business then email me on marie@vatexchange.co.uk and we’ll schedule a call.
Marie
May, 2025