Reverse charge is a VAT system where the responsibility for paying the tax is shifted from the supplier to the buyer. This system aims to prevent tax fraud and simplify trade, especially within the European Union.
What is the principle of reverse charge?
In the standard VAT system, the supplier is responsible for paying the tax. However, under the reverse charge system, the buyer is responsible for paying the tax.
This means that the supplier issues an invoice without VAT, and the buyer self-assesses and remits the tax on their tax return.
This mechanism is commonly used between VAT-registered businesses and in cross-border transactions within the EU.
When is reverse charge applied?
There are permanent and temporary applications:
Permanent reverse charge – areas defined by law:
For example, supply of gold, construction and assembly services, real estate, and goods listed in Schedule 5 of the VAT Act.Temporary reverse charge – specified by the government in Schedule 6 of the VAT Act:
For example, mobile phones, gaming consoles, integrated circuits, emission allowances.
Reverse charge is most commonly applied in construction, technology trade, and cross-border services and goods transactions within the EU.
How to correctly invoice under reverse charge?
When issuing an invoice, you must comply with the requirements set out in Section 29 of the VAT Act. The invoice does not include the VAT rate or tax amount. It must, however, contain a clear statement that "The customer is responsible for the tax".
In the UK, you must also reference the relevant section of the VAT Act.
For EU transactions, the note “Reverse charge” is commonly used.
Practical example:
Company ABC Ltd. (VAT-registered in the UK) provides construction services to XYZ Ltd..
The invoice is issued without VAT.
The invoice will state: “The customer is responsible for the tax”.
The buyer, XYZ Ltd., will self-assess and remit the VAT in their tax return.
Responsibilities of the supplier and the buyer
-
Supplier:
Issues the invoice without VAT,
Includes the transaction in their VAT reporting system (e.g., VAT return in the UK).
-
Buyer:
Self-assesses the VAT on the transaction,
Can claim input tax credit if eligible (for business purchases or resale).
Failure to properly issue the invoice or not including the transaction in the VAT reporting system could result in penalties from HMRC.
Summary
Reverse charge is an effective tool in combating tax fraud. However, it is crucial to invoice correctly, maintain records, and file reports. Businesses should regularly monitor legislative changes, as the list of transactions subject to reverse charge may change.
Information to remember:
The supplier issues an invoice without VAT.
The buyer is responsible for self-assessing the VAT.
The invoice must state: “The customer is responsible for the tax.”
This system is primarily used in construction, technology trade, and cross-border sales within the EU.
Learn more about the UK tax system, including income tax, corporate tax, VAT, and property taxes, in our article on UK Taxes.
