What is VAT reverse charge and how does it affect my invoices?

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This week's post comes courtesy of the accounting experts at Crunch, find out more about them here!


At this point in your self-employed journey, we’re sure you’re familiar with Value Added Tax, or VAT for short, but one area you may be less clear about is reverse VAT, which you may also hear referred to as a ‘reverse charge’. 

Feature_icon_yellow_paper_pound_invoice@1200xNew reverse VAT rules came into effect in March 2021, altering the way VAT-registered businesses operating under the Construction Industry Scheme (CIS) present their invoices. These news rules can be a little complex and you’ll need to understand how they affect your sales invoices and your VAT returns.

So, what exactly is reverse VAT, and how does it affect you?

Let’s discuss.

  1. What is VAT reverse charge?
  2. So what does reverse VAT mean for me?

1. What is the VAT reverse charge?

The reverse charge is a way of accounting for VAT where your end-client accounts for VAT, but the supplier of the construction services does not. The reverse charge means the end-client receiving construction services will need to pay the VAT to HMRC instead of the supplier. The end-client recovers VAT subject to the normal rules set by HMRC.

These new reverse charge rules apply to standard rate VAT or reduced-rate construction services provided by VAT registered businesses. They don’t apply to supplies of services which are zero-rated, such as the construction of housing. If you don’t make an onward supply of construction services, you won’t have an end-client and normal VAT rules will therefore apply.

  • Your 5 step guide to reverse VAT

Feature_icon_blue_update_sync@1200xHere’s a simple five-step guide to help you better understand when normal VAT applies, and when reverse VAT applies:

  1. Does the supply fall within the scope of CIS?
    1. If yes, proceed to question two.
    2. If no, normal VAT applies.
  2. Is the supply standard or reduced rated?
    1. If reduced or standard, proceed to question three.
    2. If no, normal VAT applies.
  3. Is your customer/contractor VAT registered?
    1. If yes, proceed to question four.
    2. If no, normal VAT applies.
  4. Is your customer/client CIS registered?
    1. If yes, proceed to question five.
    2. If no, normal VAT applies.
  5. Has your customer/client confirmed that they are the end-client?
    1. If yes, normal VAT applies.
    2. If no, reverse VAT applies.
VAT-reverse-charge-2_flowchart-Crunch

2. So what does reverse VAT mean for me?

If you’re a subcontractor and you’re invoicing a client/contractor in a supply chain, you’ll either have to charge VAT as normal or apply the reverse charge. For the reverse charge, your invoice total will not include VAT.

However, your invoice must include a statement advising your client/contractor that the reverse charge rules apply, stating the amount of output VAT to be applied (20% if it’s the standard rate of VAT). Your client/contractor will need to include that amount on their VAT return. You do not include anything on your VAT return about the reverse charge.

green 1-01If you are the main contractor receiving a VAT reverse charge invoice from a subcontractor, you should continue to record it as a normal expense invoice and include input VAT on your VAT return.

You’ll also need to account for the reverse charge VAT the subcontractor has notified you about. The overall effect on your VAT liability is neutral since the output VAT is covered by the input VAT.

We recommend that you speak to an accountant or specialist tax advisor if you believe the new reverse charge VAT rules apply to your business, or if you have any questions about what you need to do.

If you think you’d benefit from dedicated accountancy support, Crunch offers a complete accountancy service with unlimited support for small businesses and the self-employed.

About the author:

Crunch_logo_RED_RGB

Crunch is an award-winning online accounting service that supports freelancers, contractors, and practically anyone who’s self-employed. 

For over ten years, Crunch has combined easy-to-use, online accounting software with actual human beings, so that you’re always able to access your accounts and seek the support you need. Find out more at crunch.co.uk.


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