A reverse charge moves the obligation to account for VAT from the supplier to the customer. The supplier issues an invoice with no VAT on it and a note saying the reverse charge applies; the customer puts the VAT into their own return as if they had charged it to themselves, and reclaims it in the same return if they are entitled to. No money changes hands for the VAT, and both sides' boxes still move.
Why it exists and where it applies
The mechanism exists to stop VAT being charged, collected and then never paid over. It applies to services received from businesses in other countries, and domestically to specified sectors where that risk has been high: construction is the one most small businesses meet, under the domestic reverse charge for building and construction services. Supplies subject to the domestic reverse charge still count towards your taxable turnover for the registration threshold, which catches people out.
A worked example, both sides
A subcontractor does £10,000 of standard-rated work for a contractor and the domestic reverse charge applies. The subcontractor invoices £10,000 with no VAT and a note that the customer must account for it, and puts the £10,000 net into box 6 with nothing in box 1. The contractor puts £2,000 of output tax into box 1 as though they had charged it, £2,000 of input tax into box 4 to reclaim it, and the £10,000 net into box 7. Net effect on the contractor's payment: nil. Net effect on the subcontractor's cash flow: they never hold the £2,000, which is the point.
Getting it wrong in either direction
A supplier who charges VAT when the reverse charge applied has charged tax that was not due, and the customer cannot reclaim it, so it has to be credited and reissued. A supplier who applies the reverse charge when it did not apply has under-declared output tax and owes it. Because the test depends on what the supply is and on the customer's own VAT and, in construction, CIS status, the invoice needs the customer's status confirmed rather than assumed, in writing, before it is raised.
Questions people ask about reverse charge vat
What does reverse charge VAT mean?
The customer accounts for the VAT instead of the supplier. The supplier invoices without VAT and notes that the reverse charge applies; the customer puts the VAT in box 1 and, if entitled, reclaims it in box 4.
Does reverse charge VAT count towards the registration threshold?
Yes. Goods and services subject to the domestic reverse charge, and services from abroad you had to reverse charge, both count towards taxable turnover.
What should a reverse charge invoice say?
It shows no VAT and must make clear the reverse charge applies and that the customer is required to account for the VAT, alongside the usual invoice details.