Normally a supplier charges you VAT, you pay it to them, and they pass it to the tax authority. Under the reverse charge, the supplier charges no VAT and you account for both sides yourself — you declare the VAT you would have paid, and reclaim it in the same return.
If you're fully able to reclaim, the two cancel and the cash effect is nil. The obligation is still real, and getting the posting wrong is what causes problems.
Why it exists
Two reasons, and they explain when you'll meet it.
Cross-border services. A supplier in another country isn't registered where you are and shouldn't have to be. Shifting the obligation to the buyer removes the need.
Fraud. In sectors where a supplier could charge VAT, be paid it, and disappear without remitting it, removing the VAT from the transaction removes the opportunity. This is why construction, mobile phones, computer chips and wholesale energy attract domestic reverse charge rules.
Where you'll encounter it
Services bought from abroad. The most common by far. Cloud software, advertising, contractors, professional services from an overseas supplier. Their invoice will carry no VAT and usually a note saying the reverse charge applies — and it often arrives in another currency as well.
Domestic construction services in the UK, between VAT-registered businesses in the CIS chain — with the notable exception of supplies to an end user, who is charged VAT normally. That exception is where most of the errors are.
Specified goods — mobile phones, computer chips, wholesale gas and electricity, emissions allowances. Usually above a threshold.
Rules differ by country and change. This is general guidance, not advice on your situation.
How the posting works
An invoice for £1,000 of services from an overseas supplier, standard rate 20%:
| Amount | |
|---|---|
| Invoice value | £1,000 |
| Output VAT you declare | £200 |
| Input VAT you reclaim | £200 |
| Net VAT effect | £0 |
| Cash you pay the supplier | £1,000 |
Both entries appear on the return. The net is nil, but the boxes are not.
The mistake that matters is treating a reverse charge invoice as zero-rated or "no VAT" because none was charged. That's understandable and wrong: it understates both boxes, and your return no longer reconciles to your ledger. It's also exactly what a VAT inspection looks for.
Every accounting package has specific reverse charge tax rates. Use them rather than improvising with a zero rate.
When you can't reclaim in full
If you're partially exempt, or the cost relates to non-business use, you declare the output VAT in full and reclaim only your recoverable proportion. Then the reverse charge has a real cash cost rather than netting to nil.
This is the case most often got wrong, because the "it all cancels out" shorthand has become the way people describe the mechanism. It cancels out only if you can reclaim everything.
Spotting one
A reverse charge invoice usually shows:
- No VAT amount, or VAT shown at 0.00
- A note such as "reverse charge applies" or "customer to account for VAT"
- Both parties' VAT numbers, which is a requirement for cross-border supplies
- A total equal to the net
If a supplier you'd expect to charge VAT hasn't, and there's no note, ask before posting. The two possibilities — reverse charge, or a supplier who has made an error — need opposite treatment.
Practical habits
Set the treatment per supplier where it's consistent, so the decision is made once.
Flag overseas suppliers in your supplier records. They're the common case and the easiest to spot in advance.
Check the construction exception if you're in the UK CIS chain — end user status changes the answer entirely, and it's a question about your customer rather than your supplier.
Reconcile the two boxes, not just the net. A net of nil hides a pair of numbers that should match your ledger and often don't.
Cribble reads the VAT treatment on an invoice rather than assuming a rate, and flags fields it isn't certain about — including the case where a supplier has charged no VAT and it isn't obvious why.