When does the reverse charge apply to expenses?

What is the reverse charge?

In most cases, your suppliers will charge you VAT on their invoices, assuming the goods or services are standard-rated. You will then reclaim input tax on your next return. However, for some supplies - particularly international transactions - you will account for the VAT as the customer in Box 1 of your next return, claiming input tax in Box 4 for the same amount. This is known as reverse charge accounting. The reverse charge applies to all services you buy from overseas suppliers that are standard-rated under UK law.

Example. Accountant Jane uses the services of an India-based bookkeeper to carry out accounting work. The business charged her £5,000 in the last period, so she will account for output tax of £1,000 in Box 1 of her next return; she will claim the same amount as input tax in Box 4. She will record the net figure of £5,000 in both Box 6 and 7 of the same return.

The Box 6 entry only applies to international services rather than other reverse charge supplies where only Box 7 is relevant. A common error is to forget to apply the reverse charge to your online purchases of advertising from abroad, e.g. from Google or Amazon.

Importing goods

If you import goods, you should have elected for postponed VAT accounting for all your arrivals. This means that you will not be charged VAT by HMRC when the goods arrive in GB but will download monthly statements from the HMRC website, so that you can do a reverse charge entry for your imports instead.

If you use the cash accounting scheme, you will still account for the reverse charge according to the import date and not the date you pay your overseas suppliers.

As with all reverse charge entries, you must restrict your input tax claim in Box 4 for any private, non-business or exempt use.

Construction industry

If you are registered for both VAT and the construction industry scheme, you will account for the reverse charge on most supplies of building services you buy from other VAT-registered builders, assuming you sell them on to your own customer. If the work is not sold on, e.g. work on your head office building, your supplier will still charge you VAT in the normal way.

If your subcontractors charge you VAT when the reverse charge should apply, then HMRC will have the power to assess you for output tax, i.e. as if the Box 1 entry had been made.

Other goods and services

Reverse charge accounting for the construction industry is an anti-fraud measure, to prevent suppliers from charging 20% VAT and not declaring it on a return. There are other goods and services subject to reverse charge accounting as a fraud prevention measure, including business-to-business sales of mobile phones and computer chips where the invoice value exceeds £5,000 excluding VAT. These are detailed in VAT Notice 735.