About this episode

VAT reverse charging can feel confusing because it turns the normal VAT process around. Instead of the seller charging VAT and paying it over, the buyer may need to account for the VAT in their own VAT return.

In this episode, we explain what VAT reverse charging means, why governments use it, and how it can affect goods, services, imports, overseas customers, invoices, and compliance. We also look at the post-Brexit context for UK businesses while keeping the main focus on the practical principle: who accounts for the VAT, and what evidence we need to keep.

If you need a broader VAT foundation first, our episode on Value Added Tax and Your Business: Pricing, Registration and Profit explains how VAT affects pricing, registration, cash flow, and profit.

What you’ll learn in this episode

• What VAT reverse charging means in simple terms.
• Why reverse charge VAT shifts responsibility to the customer.
• How the reverse charge can apply to goods and imports.
• How reverse charging can apply to services and overseas suppliers.
• What to check when your business is the seller.
• What to check when your business is the buyer.
• Why invoices, VAT numbers, customer location, and evidence matter.

What is VAT reverse charging?

VAT reverse charging is a mechanism that shifts the responsibility for accounting for VAT from the seller to the customer. In a normal VAT transaction, a VAT-registered seller charges VAT, collects it from the customer, and pays it over through the VAT return.

Under the reverse charge, that process changes. The seller does not charge VAT in the usual way. Instead, the customer accounts for the VAT as if they had made the supply to themselves, and then claims it back where the rules allow.

In many business-to-business situations, the result can be VAT neutral. No VAT cash moves between the two businesses, but the transaction still needs to be recorded properly.

Why governments use the reverse charge

Governments like reverse charge mechanisms because they can reduce VAT fraud and evasion. It is often easier for a tax authority to check the customer in their own country than to chase an overseas supplier.

The episode compares it to a reverse charge phone call. The person receiving the call picks up the bill. In VAT terms, the buyer takes on the responsibility for accounting for the VAT.

However, this does not mean the seller has no responsibilities. Verification, invoice wording, customer checks, records, and evidence still matter.

VAT reverse charging and goods

The episode was recorded as UK businesses prepared for major post-Brexit VAT changes. From that point, goods moving between the UK and European Union were treated differently from how they had been treated while the UK was part of the EU VAT system.

For goods sold to overseas business customers, VAT treatment can depend on where the customer belongs, whether they are VAT registered, and whether the sale is treated as an export. The important point is that businesses still need to record the sale and keep evidence to support the VAT treatment.

For goods imported into the UK, the episode explains postponed VAT accounting as a cash flow support mechanism. Instead of paying import VAT at the border in certain situations, VAT-registered businesses may account for it through their VAT return. Because VAT rules and customs procedures can change, businesses should check current guidance before acting.

VAT reverse charging and services

Services often involve place of supply rules. In many business-to-business situations, the customer accounts for VAT in their own country rather than the overseas supplier charging VAT.

There are exceptions. The episode mentions areas such as land and property, admission to cultural or educational events, and entertainment-related services. These can depend on where the land is located or where the event takes place.

If we provide services to an overseas business customer, we need to confirm that they are a business and, where relevant, that they are VAT registered. If we buy services from overseas suppliers, reverse charge rules may also affect how we record the purchase on our VAT return.

When your business is the seller

If we are the seller and the reverse charge applies, we usually do not charge VAT in the normal way. However, we still need to make sure the invoice and records are correct.

The invoice should clearly show that the transaction is subject to the VAT reverse charge where the rules require that wording. We also need evidence that the customer is a business, confirmation of their location, and a valid VAT number where appropriate.

This is where compliance matters. If we apply reverse charging incorrectly, fail to keep evidence, or charge VAT when we should not, we may create avoidable problems later.

When your business is the buyer

If we are the buyer and the reverse charge applies, we need to check the supplier invoice and account for the VAT correctly.

That may include checking the invoice wording, checking the amount and tax rate, converting foreign currency into sterling where needed, and making the correct entries on the VAT return.

The reverse charge does not mean the transaction disappears. It means the responsibility for accounting for the VAT moves to the buyer.

VAT compliance and record keeping

VAT reverse charging is a compliance issue as much as a technical VAT issue. Good records help us prove why VAT was or was not charged, who the customer was, where they belonged, and how the transaction was reported.

For wider VAT responsibilities, deadlines, records, penalties, and practical compliance, our updated episode on VAT in the UK: How It Works and How to Stay Compliant is a useful follow-on.

Software and systems can also help. If we sell digital products, online training, e-books, services, or goods across borders, the system we use should support the right VAT treatment, invoice wording, customer evidence, and reporting.

Practical VAT reverse charge checklist

• Check whether the transaction is goods, services, digital products, or another type of supply.
• Confirm whether the customer is a business or consumer.
• Check the customer’s location and VAT registration details where relevant.
• Use the correct invoice wording when reverse charging applies.
• Do not charge VAT where the reverse charge rules say the customer accounts for it.
• If buying from overseas suppliers, check whether we need to account for VAT on our return.
• Keep evidence, invoices, VAT numbers, and location records.
• Review software settings so VAT treatment is applied correctly.
• Check current HMRC guidance before relying on old Brexit-era assumptions.

Related episodes

• Value Added Tax and Your Business: Pricing, Registration and Profit
• VAT in the UK: How It Works and How to Stay Compliant
• An Introduction to what VAT is

Key takeaway

VAT reverse charging changes who accounts for VAT, but it does not remove the need for care. The customer may take on the VAT reporting responsibility, but the seller still needs to check, record, and evidence the transaction properly.

For businesses buying or selling across borders, reverse charge VAT can affect invoices, VAT returns, cash flow, systems, and compliance. The safest approach is to understand the principle, check the customer and transaction type, and keep records that support the VAT treatment.

If VAT reverse charging, imports, services, or invoice wording feel unclear, visit ihatenumbers.co.uk or listen to the related VAT episodes above to build more confidence with your numbers.

Plan it, Do it, Profit.

“Reverse charging shifts the VAT responsibility, but it does not remove the need for evidence and compliance.”

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Episode Timecodes

• 00:00 – Welcome to the I Hate Numbers podcast
• 00:28 – Brexit context and why reverse charging matters
• 01:11 – What the episode covers: goods, services and compliance
• 02:17 – A simple VAT example before reverse charging
• 03:06 – How reverse charging shifts VAT responsibility to the customer
• 03:55 – Why governments use reverse charging
• 04:17 – Goods, exports and overseas customers
• 05:56 – Imports and postponed VAT accounting
• 07:34 – Services and place of supply rules
• 10:44 – Invoice wording, VAT numbers, location checks and compliance

About the Podcast

The I Hate Numbers podcast helps business owners understand accounting, tax, finance, profit, cash flow, and business planning in a practical way. We simplify financial topics so you can make better decisions and feel more confident with your numbers.

You can also watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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🌐 Website

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Welcome to episode 44 of I Hate Numbers. It's our last weekly episode of 2020, and as I'm recording this on Christmas Eve, thinking about Christmas tomorrow morning, thinking about the end of the year, I'm also thinking about a major change that's going to happen and that's going to affect UK businesses,

and on the 1st of January, 2021, Brexit will have happened and the United Kingdom will have left the EU after 47 years of marriage. In this particular podcast episode, I'm going to focus on reverse charging mechanism that exists in VAT, have a look at what it actually is. The good thing is the essence, the raw changes stay largely the same.

There is some good news in the reverse charging mechanism for UK businesses from the 1st of January, 2021, and what I'm going to cover in this particular episode are five elements. I'm going to check out and give you an overview of what reverse charging is, and why governments love it so much. We're going to look at that reverse charging when it refers to goods that you buy in or you sell on to your overseas customers.

We'll look at services that are purchased in and provided onwards to your customers, what information that you need in order to make sure that you comply with the rules and don't get into hot water, and what your next steps are. Useful to flag up that if you check previous podcast episodes, we've covered

the overview of Brexit and how it applies to your business, not just in VAT terms, but in terms of importing and exporting, procedures, forms, GDPR, and the like. Okay, let's crack up with a broadcast. Now, first of all, let's think about what reverse charging is. Now, I think the easiest way to look at this is to probably illustrate that by way of an example.

Now, imagine you are a business in the UK and you are currently registered for UK VAT. You sell goods to a customer in the United Kingdom for a hundred pounds, you have VAT at the 20% rate, and your invoice value to the customer will be 120 pounds. Of that, when the customer settles, the hundred pounds will be yours to keep, to help recoup and cover your costs.

20 pounds of that VAT you've collected is called output VAT and that's what you owe to the tax office. Now, if we then step into the shoes of your customer. Your customer, and let's assume their VAT registered as well, they will claim that 20 pounds back. It's called input VAT, and they offset that against their VAT bill that they owe to the tax office.

If we look at the situation together, you've paid over VAT in one hand to the government. The government then handed that money back to your customer. Overall, it's what's called a VAT neutral situation. Now, reverse charging actually puts these two steps together and fundamentally shifts the responsibility for the VAT onto your end customer.

So, your customer will declare on their VAT return, what they owe on that sale as though they'd sold it to themselves. So, they recall 20 pounds owing. They also then in the same breath, claim that 20 pounds back. So, overall, no cash will leave that business and, therefore, the onus of accounting threat falls on the customer and it ends up in the same situation as far as the government is concerned.

Cash in and cash out cancels itself out and the customer has smoothly dealt with that responsibility all in one. One of the reasons governments like this mechanism is because it reduces the level of fraud and evasion. It's easier to chase a customer for any taxes that have not been accounted for than it is to chase an overseas supplier.

Now, let's take that same scenario and that same transaction. You send it to one of your customers who's located in Germany and they are registered for German VAT. It's worth emphasising that we are now talking about the situation as it will apply on the first January, 2021, and not while we're still in the EU up to the end of this calendar year, 2020.

Now, that same transaction, you sell those goods to your German customer who’s registered for German VAT. You will not charge VAT on that sale. They in themselves would reverse charge this transaction. So, the invoice goes to them for a hundred pounds, or in euros if that's what the currency will be. They will then calculate the amount of German VAT that's owing as though the sale had been made in Germany and they claimed for it at the same time.

No cash changes hands and, overall, it’s much neutral. Now, it's worth remembering that up until the end of December, 2020, goods going into the EU are not classified as exports. From the 1st of January, 2021, all goods going into the EU, as they will be for the rest of the world, will be classified as exports.

So, goods supplied to the countries outside the UK will be exports. They will be zero-rated for VAT. You don't have to declare the VAT on that. You need to record the sales, however. So, important thing is though goods going into Europe will be subject to the reverse charging mechanism. Now, let's flip it the other way round, and let's look at goods coming into the UK, which you procure for your business.

Any goods coming into the EU will be classified as imports and VAT will now be due on these consignments. Now, there's some good news, and this applies not just to the EU by the way, but also any imports coming into the United Kingdom, and for our purposes, the United Kingdom refers to England, Scotland, and Wales.

There are particular special rules for Northern Ireland, which we've dealt with on previous podcasts, and will no doubt come back to again. The UK government are introducing a scheme called postponed accounting and this is effectively a reverse charging mechanism. What this means is that if your business is VAT registered, you'll not have to pay VAT on those goods that are reported when they arrive in the United Kingdom.

Instead, you delay any VAT declaration as such until those goods are sold on, until effectively you declare those on your next VAT return. So, the VAT payment will actually be postponed, nothing to pay at the point of entry, and instead, what you do when you complete your next VAT return, you account for the VAT that has been charged and you also deduct the VAT that's claimed.

And that's going to be a massive cash boost for all VAT registered businesses that import goods into the UK. So let's recap. No money has to change hands to pay for the VAT. Instead, if you can choose, this is an optional scheme, all VAT registered businesses for wherever the goods are imported, we will be able to reply to the reverse charging mechanism to those goods that have come in to the UK.

Now, I'll point out it's an optional scheme, but if you decide to defer your customs declarations at the point of import, then it's a mandatory scheme. Let's move on to services now. Generally speaking, with services, we operate under what's called the place of supply rules, which we covered on previous episodes of I Hate Numbers, Now, in what are called place of supply rules,

if I do B2B sales, business to business, generally speaking, it’s the customer's responsibility to account for the VAT. I don't charge VAT and the transaction is reverse charged. There are always exceptions to any general rule, and these typically, the headline exceptions will relate to things like land and property, admission to cultural, artistic, educational entertainment, or similar events where typically we go by where the land is located or where the enjoyment, the entertainment is consumed.

Now, those exceptions aside, if you provide services under a B2B rule in the EU and you verify that your customer is VAT registered, then it's reverse charged. Under the general rule, you just need to verify they are a business and as we'll round up at the end, we'll mention what the actual details are that you need.

Now, on the other side, if you procure services from overseas, anything from advertising services, anything that you buy in from anywhere outside the UK, then the reverse charge mechanism applies. If your supplier charges you in their currency, you have to convert that into sterling, calculate the amount of VAT that would be due

on that transaction, include that in your VAT return, and in the same token, you deduct that VAT as input VAT. That's boxes one on four that you'd use to record that and that's what currently goes on at the moment, and that will then apply to services procured from the EU from the 1st of January, 2021.

It's worth mentioning as we come up to the tail end of this podcast about providing services into EU. One of the key exceptions will be, and the thing is that difference is not necessarily a B2B scenario, is where you provide digital services. So, if you provide digital services to a business that's registered in the EU,

if they are validated as a B2B, then VAT does not have to be deducted. It's reverse charging mechanism. If they are a consumer, then reverse charging mechanism does not apply. So, let's recap. We've looked at what reverse charge mechanism is, and that's where it's the customer, your customer who has to account for the VAT due on the transaction,

and then they make the necessary deduction in their own VAT return. We've talked about goods, so goods coming in to the UK. You apply the reverse charging mechanism on that if you are a VAT registered business, and that applies to all imports of any value. The final piece in the jigsaw for reverse charge mechanism is what do you need as a business to be able to do?

What's the compliance aspects that need to be adhered to? Now, if you are using the reverse charging mechanism, if you are the seller, then make sure that you do not charge VAT on that sale. Make sure clearly on your invoice to your customer, that you include the phrase subject to the VAT reverse charge.

Make sure you have proof that your customer is actually a business and where appropriate they are VAT registered, so you need to make sure that you obtain the VAT number, and you also have to check your buyer's location and validate that the VAT number is valid. If you are the buyer and you're caught by the reverse charge mechanism, check that the invoice

is appropriately correctly calculated, the amount and tax rate are valid. Make sure that the invoice clearly states and indicates that the reverse charging mechanism is being used, and make sure you account that on your VAT return. So, in summary, folks, the principle of the reverse charging mechanism largely remains unaltered.

There is a new change in the importation of goods, which will be a beneficial cash flow to your UK business. When you provide services into the EU in under the general rule, then B2B, make sure you get a valid VAT number and check the location of that customer, otherwise, you'll be exposed to subpotential penalties and fines.

Make sure your systems are calibrated to actually do a lot of these verification checks. Now, what are your next steps? Your next steps are, enjoy the last few days of 2020. Get prepared for a brave new world in January, 2021. When Brexit actually happens,check out our website, resource pages for additional support and help.

And above all, have a fantastic New Year and I'll see you folks in 2021. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.