Definition
Reverse charge VAT is a mechanism used in cross-border business-to-business (B2B) transactions within the EU and between the EU and UK. Instead of the seller charging VAT and remitting it to their tax authority, the buyer accounts for VAT in their own country. The seller issues a zero-rated invoice.
How reverse charge works
- A UK seller supplies goods to a VAT-registered business in France
- The seller issues an invoice at zero VAT with a note: "Reverse charge - customer to account for VAT"
- The French buyer declares the purchase on their own VAT return, both as input and output VAT
- The net effect for the buyer is zero if they can reclaim VAT in full
- The seller reports the sale as zero-rated on their UK VAT return and EC Sales List
When reverse charge applies
Reverse charge typically applies when all of these conditions are met:
- The transaction is B2B (both parties are VAT-registered businesses)
- The buyer is in a different country from the seller
- The buyer provides a valid VAT registration number
- The goods or services fall within the scope of the reverse charge rules for that jurisdiction
Invoice requirements
A reverse charge invoice must include:
- The seller's VAT number
- The buyer's VAT number
- A clear statement that the reverse charge applies
- The net amount with zero VAT charged
- The applicable VAT rate if the transaction were domestic (for reference)
Reporting requirements
- Seller: reports the sale as zero-rated on their VAT return and includes it in the EC Sales List
- Buyer: reports the purchase on their VAT return as both output and input VAT
Common mistakes
- Charging VAT on a B2B cross-border sale when reverse charge should apply
- Not validating the buyer's VAT number before zero-rating
- Omitting the reverse charge notice from the invoice
- Failing to include the sale in the EC Sales List