Reverse charge VAT invoices: how to read and record them

How does reverse charge VAT work on a supplier invoice?

Normally the supplier charges you VAT and pays it to HMRC. Under a reverse charge, the supplier does not charge it and you account for it instead. You work out the VAT due, include it in your VAT Return, and debit and credit your VAT account with the same amount. HMRC's own summary is that this means there will be no tax for you to pay, unless your business is partially exempt.

Two situations matter for most UK bookkeepers:

• Services bought from a supplier outside the UK. HMRC says the reverse charge applies when your business buys services from outside the UK. VAT Notice 741A covers the place of supply rules.
• Domestic reverse charge for building and construction. A UK VAT-registered subcontractor invoices you without VAT and you account for it (HMRC guidance for buyers).

What does a reverse charge invoice from abroad look like?

Like an ordinary invoice with the VAT line at zero or missing. It shows the net price for the service and no UK VAT. The wording varies by supplier and country, and a note is not what triggers your obligation: the rule follows where the supplier belongs and what service it is. So check the supplier's address and the service, not the footer text.

To account for it, HMRC's steps are:

1. Convert the value of the services into sterling using the correct exchange rate.
2. Calculate the VAT due at the UK rate and include it in your VAT Return.
3. Credit your VAT account with that amount, then debit it with the same amount.

Example (illustrative numbers): a US consultancy invoices you $1,250 for a design review, which converts to £1,000. VAT at 20% is £200. Your return shows £200 in box 1 and £200 in box 4, so the net VAT effect is nil, and the £1,000 goes into boxes 6 and 7.

HMRC lists services with different rules, including hiring transport, land and property services, events, restaurant and catering services, and some electronically supplied services such as web hosting. If your invoice falls into one of those, check the exceptions before applying the standard treatment.

What does a UK domestic reverse charge invoice for construction look like?

It is a full VAT invoice with the VAT not added to the total. Invoices for services under the reverse charge must include the reference "reverse charge". HMRC's technical guide gives these examples of wording that meets the requirement:

• VAT Act 1994 Section 55A applies
• S55A VATA 94 applies
• Customer to pay the VAT to HMRC

The supplier must also show the details of a normal VAT invoice. The invoice should state how much VAT is due under the reverse charge, or the rate if the amount cannot be shown, but the VAT is not included in the amount charged.

Example (illustrative): a subcontractor invoices £2,000 for plastering, marked "Reverse charge: customer to pay the VAT to HMRC", with £400 shown as the VAT you must account for. You pay £2,000, not £2,400.

You account for it as the buyer when you are VAT registered in the UK, the supply is standard or reduced rated, it is reported within the Construction Industry Scheme (CIS), and you have not told the supplier in writing that you are an end user or intermediary supplier. HMRC's list of services covers construction work. Manufacturing components, architects' work and installing security systems are excluded when supplied on their own. For the CIS deduction on the same invoice, see what a CIS invoice must show.

How do I record a reverse charge bill in Xero?

Xero picks the boxes from the tax rate, so choosing the right rate is the whole job.

• Services from abroad: use a tax rate with the Reverse Charges tax type, such as the default Reverse Charge Expenses (20%) rate if it is in your list. Xero assigns these transactions to the VAT return boxes (About non-standard tax rates).
• Domestic reverse charge (construction): use Domestic Reverse Charge @ 20% (VAT on Expenses) or Domestic Reverse Charge @ 5% (VAT on Expenses). Xero puts the VAT in box 1, reclaims it in box 4 and puts the net value in box 7 (Create a Domestic Reverse Charge invoice or bill).

Xero's tip: save the rate as a purchases default on each domestic reverse charge supplier's contact, and it applies automatically to new bills. If the domestic reverse charge rates are missing, Xero says to add the rates first. Flat rate scheme returns do not support the domestic reverse charge, so those transactions have to be added manually.

How do I record a reverse charge bill in QuickBooks Online?

QuickBooks Online (UK) uses VAT codes that you select on the bill. Intuit's common VAT codes page lists RC - 20% SG as the default reverse charge VAT code for services. It reports to box 1 (output VAT), box 4 (input VAT), box 6 (value of the deemed supply) and box 7 (purchase value).

For construction, QuickBooks says it has two reverse charge VAT codes, 20% and 5%. If VAT and CIS are already on, you only need to enable and select the code on the bill, and no return adjustment is needed. QuickBooks' pages do not give the names of those two codes, so open your VAT code list and pick the reverse charge entries there.

How do I record a reverse charge bill in FreeAgent?

Turn on the VAT rates first. In Settings, open VAT Registration and answer Yes to "Do you need to use VAT rates other than standard UK ones?", then save.

• Services from abroad (England, Scotland, Wales): when adding a bill, choose Reverse Charge under VAT Options and Auto for the VAT rate. The contact's address must be outside the UK. FreeAgent adds the VAT to boxes 1 and 4 and the net amount to boxes 6 and 7 (FreeAgent support). Northern Ireland businesses choose EC Services instead.
• CIS bill with domestic reverse charge: add the CIS bill, then choose Reverse Charge under VAT Options, and enter the gross amount in Total Price. FreeAgent adds 20% VAT. For 5% work, FreeAgent says you need journals to correct boxes 1 and 4, and you may need to adjust box 6 (FreeAgent support).

Record the purchase once. FreeAgent warns that using a bill, an expense and a bank explanation for the same purchase double or triple counts the cost.

What goes wrong with reverse charge invoices?

• Reclaiming VAT nobody charged. If you enter the bill at a normal 20% rate, your return reclaims input VAT that no one accounted for. Use the reverse charge rate, so the software adds the VAT to box 1 and reclaims it in box 4.
• Wrong rate on construction work. Some conversion work is taxed at 5%. Check the rate on the invoice against the rate in your software.
• Missing wording. If a construction invoice arrives with VAT added and no reverse charge reference, ask the supplier to reissue it before you pay.
• Coding each time by hand. Set the rate once per supplier where your software allows it.

If you capture supplier invoices in Datamolino, the tax codes you can pick come from the connected accounting system (Xero, QuickBooks Online or FreeAgent), so choose the reverse charge code there. You can save supplier coding as a default for that supplier. Invoice automation covers capture. If the VAT on a captured bill does not add up, see what to check when invoice lines do not add up.

Does the domestic reverse charge apply to every construction invoice?

No. HMRC says it applies when you are VAT registered, the supply is standard or reduced rated, payment is reported within the Construction Industry Scheme, and you have not told the supplier in writing that you are an end user or intermediary supplier. It does not apply to work such as architects' professional services when supplied on their own.