What is the VAT reverse charge?

The reverse charge mechanism is a tax system where the responsibility for reporting and paying VAT shifts from the seller to the buyer of goods or services. This is commonly used in cross-border transactions within the EU or in specific domestic cases to prevent tax evasion and reduce administrative burdens for suppliers. Under this mechanism, the buyer must declare both the input and output VAT, effectively making it a self-accounting process.

How does this relate to UK companies?

For UK companies, the reverse charge mechanism applies mainly to cross-border transactions and certain domestic industries. Post-Brexit, UK businesses importing services from the EU must apply the reverse charge and account for VAT themselves. Domestically, the construction industry (CIS VAT Reverse Charge) shifts VAT responsibility from subcontractors to contractors. For international services, if a UK company provides services to a foreign business, the transaction is often outside the scope of UK VAT, and the recipient applies local VAT rules.

When do UK businesses need to register for VAT?

UK businesses must register for VAT in the EU if they store goods in the EU, sell B2C, or provide taxable services that require local VAT collection. Post-Brexit, UK businesses no longer have an automatic VAT registration in the EU and may need to appoint a fiscal representative in some countries. Each EU member state has its own VAT rules, so businesses should check local requirements.

How does VAT work in invoicing?

When a UK company invoices an EU company, VAT treatment depends on the type of transaction:

• B2B services: The reverse charge mechanism applies, meaning the UK company does not charge VAT, and the EU business accounts for VAT in its own country.
• B2C services: The UK company may need to register for VAT in the EU if providing digital services or other taxable supplies.
• B2B goods: When exporting goods to the EU, UK businesses typically apply a zero-rate VAT, but the EU importer is responsible for paying VAT and duties upon arrival.
• B2C goods: If selling directly to EU consumers, VAT must be charged based on the customer’s location, potentially requiring IOSS (Import One Stop Shop) registration for shipments under €150 (around £125).

What is the purpose of the reverse charge mechanism?

The reverse charge mechanism is designed to shift VAT responsibility from the supplier to the buyer in certain transactions. Its main purposes include:

• Preventing VAT fraud: Reduces the risk of missing trader fraud, where suppliers charge VAT but do not remit it to tax authorities.
• Simplifying cross-border transactions: Allows B2B services between different VAT jurisdictions to be handled without suppliers registering for VAT in multiple countries.
• Improving cash flow: Buyers do not need to pay VAT upfront and reclaim it later, which helps with liquidity management.
• Reducing administrative burden: Eliminates the need for suppliers to collect and remit VAT, shifting compliance responsibility to the buyer.

It is commonly used in cross-border EU transactions, imported services, and certain domestic industries like construction (CIS VAT Reverse Charge) in the UK.

How has Brexit affected reverse charge?

Since Brexit, there have been many changes to the reverse charge mechanism for UK businesses selling to EU businesses:

• B2B services: The reverse charge still applies, meaning UK businesses do not charge VAT on services to EU businesses. The EU customer accounts for VAT in their country.
• B2B goods: Sales to EU businesses are now treated as exports and are zero-rated for UK VAT. The EU buyer must pay import VAT and duties in their country.
• EU VAT registration: UK businesses may need to register for VAT in the EU if holding stock in an EU country or selling B2C.
• No EU VAT number checks: UK businesses can no longer use the EU VAT number validation (VIES) system, and must now check VAT numbers manually.
• Fiscal representation: Some EU countries now require a fiscal representative for UK businesses registering for VAT.
• OSS & IOSS: UK businesses selling B2C in the EU may need IOSS (Import One Stop Shop) registration for low-value shipments or register for VAT in multiple EU countries.

These changes mean UK businesses must comply with EU import VAT rules, potentially increasing administrative and compliance costs.

How to indicate reverse charge on invoices (Example and template)

When a UK business sells to an EU business and the reverse charge mechanism applies, invoices should include the following:

1. No UK VAT: Do not charge VAT on the invoice.

2. Customer’s EU VAT number: Include the buyer’s VAT number to confirm they are a taxable business.

3. Reverse charge statement: Clearly state that the reverse charge applies with one of these phrases:

• ‘Reverse charge applies – customer must account for VAT’.
• ‘VAT exempt – Article 44 and 196 of the EU VAT Directive 2006/112/EC’.

4. Supplier & customer details: Include both company names, addresses, and VAT numbers.

5. Invoice breakdown: Show the net amount without VAT and state that the buyer is responsible for VAT in their country.

For transactions with non-English-speaking EU customers, you may also include the reverse charge notice in the respective local language (see table below for examples).

Important notes

In addition to this reverse charge notice, invoices for cross-border transactions within the EU must include both the supplier’s and the recipient’s VAT identification numbers. Make sure you do not to mistakenly include VAT on a reverse charge invoice, as this can easily happen out of habit.

Please refer to the legal disclaimer for this article.