Reverse-charge VAT

Under normal VAT, the supplier charges VAT on the sale, collects it from the buyer, and pays it to the tax authority. Under reverse charge, the supplier issues a zero-VAT invoice and the buyer accounts for the VAT itself, recording both the output VAT (as if it had sold the item) and the input VAT (reclaiming it). The net effect for a fully taxable buyer is nil, but the transaction still goes through the buyer's VAT return.

The most common case is cross-border B2B services within the EU, and between the UK and EU post-Brexit. A UK consultancy invoicing a German company for advisory work charges zero VAT and adds a reverse-charge note. The German buyer self-accounts in its own VAT return. The mechanism avoids the consultancy having to register for VAT in every country it sells to.

Reverse charge also applies domestically in specific industries. In the UK, the construction industry reverse charge covers B2B supplies of construction services within the Construction Industry Scheme. The invoice still goes out at zero VAT, but with reverse-charge wording, and the buyer (typically a main contractor) handles the VAT accounting.

Invoice wording is not optional. HMRC and EU tax authorities require a specific phrase on the invoice, usually "Reverse charge: customer to account for VAT" or wording referencing the relevant legislation. The buyer's VAT number must also be on the invoice for the transaction to qualify.