Reverse charge

Also called Domestic reverse charge, VAT reverse charge

A VAT rule that moves the obligation to account for the tax from the supplier to the customer.

What it means

Normally the supplier charges VAT and pays it to HMRC. Under a reverse charge, the supplier charges no VAT and the customer accounts for both the output and input VAT on their own return — usually cancelling out.

It applies to construction services under CIS, to some other domestic sectors introduced to counter fraud, and to most services bought from overseas suppliers.

Why it matters

For construction subcontractors it was a substantial cash flow change: VAT they previously held for up to three months no longer arrives at all.

For anyone buying software or services from abroad, it means VAT still has to be accounted for even though the invoice shows none — commonly missed.

What it looks like in practice

Invoices under the domestic reverse charge must say so and state that the customer is to account for the VAT. Accounting software handles it with the right tax code, but the code has to be chosen.

Check whether your customer is an end user. The construction reverse charge does not apply to supplies to end users or intermediary suppliers, and they must tell you in writing.

What to watch out for

Charging VAT when the reverse charge applies, which leaves your customer unable to reclaim it and you holding money you have to refund.

Overseas software subscriptions. A business under the VAT threshold can be pushed over it by reverse-charge purchases, which surprises people.

Where to get proper advice

GOV.UK for the sector rules. Your accountant for the tax codes in your software — this is where it actually goes wrong.