Reverse charges are a common sticking point with value-added tax (VAT). These charges feel counterintuitive and go against the normal flow of tax. But for certain UK businesses, especially those involved in cross-border services or specific domestic sectors, the reverse charge is the norm under His Majesty’s Revenue and Customs (HMRC).

If you handle invoicing, VAT returns, or finance operations in a UK business that buys services from abroad or operates in a high-risk sector, HMRC reverse charge VAT rules matter. Below, we break down how the reverse charge works, when it applies, and what you must get right.

What’s in this article?

• What is HMRC reverse charge VAT?
  
• Why does HMRC use reverse charge VAT?
  
• When does the reverse charge apply in the UK?
  
• How should businesses handle reverse charge VAT on their returns?
  
• What are common compliance errors, and how can businesses avoid them?
  
• How Stripe Invoicing can help
  

What is HMRC reverse charge VAT?

Reverse charge VAT is a mechanism that shifts reporting responsibility from the supplier to the customer. Instead of adding VAT to an invoice and paying it to HMRC, the supplier issues a net-only invoice, and the customer accounts for the VAT on their return.

In practice, the supplier leaves VAT off the invoice, the customer calculates the VAT that would have been charged, and the record is VAT due and (if eligible) VAT reclaimable. Typically, those amounts will cancel out for fully taxable businesses, but the transaction remains visible to HMRC. This visibility enables HMRC to monitor and prevent VAT fraud.

You’ll typically see the reverse charge in cross-border B2B services and specific UK sectors in which VAT fraud has been a problem, such as construction or mobile phone wholesale. No VAT changes hands, but the customer takes responsibility for reporting it.

Why does HMRC use reverse charge VAT?

VAT fraud is expensive and common. A frequent tactic is for a supplier to charge VAT, collect the money, and disappear before paying it to HMRC, while the customer claims the VAT back. The loss falls on the tax authority.

The reverse charge eliminates that risk by shifting reporting to the customer. Because the customer is usually the more stable part of the supply chain, HMRC can rely on the VAT being correctly declared. The tax is still accounted for, but it never sits with a potentially fraudulent supplier.

HMRC has expanded the reverse charge into high-risk areas such as telecoms, energy trading, and construction.

When does the reverse charge apply in the UK?

HMRC applies the reverse charge when VAT fraud is a recurring issue or when enforcing VAT through the supplier is impractical. Some apply to domestic transactions and some to cross-border services. Here are the kinds of goods and services it applies to:

Domestic UK supplies

These industries use the reverse charge routinely as part of day-to-day compliance:

• Construction services in which the customer isn’t the user

• Wholesale mobile phones and computer chips (usually over £5,000)

• Wholesale gas and electricity

• Carbon credits and renewable energy certificates

• Certain telecoms services

Cross-border services

If a UK VAT-registered business buys services from a supplier based outside the UK, the reverse charge typically applies by default. This applies to many B2B supplies received internationally, including:

• Software, digital tools, and development

• Marketing, design, and creative services

• Professional services (legal, accounting, consulting)

• Royalties and intellectual property (IP) licensing

If the supplier is outside the UK and the place of supply is the UK, the reverse charge almost always applies.

Imported goods using postponed VAT accounting (PVA)

Instead of paying VAT at the border, businesses can account for import VAT on their return. It works as a reverse charge for goods, which reduces the cash flow strain and keeps reporting consistent.

Anything not in these categories remains subject to standard VAT rules.

How should businesses handle reverse charge VAT on their returns?

The reverse charge doesn’t change the tax rate, only who reports it. To stay compliant, suppliers and customers must get their VAT returns right.

Here’s what that looks like:

If you’re the supplier

• Leave VAT off the invoice.

• Explain that the customer is responsible for VAT under the reverse charge mechanism with a line such as: “Reverse charge: customer to account for VAT to HMRC.”

• Report the net sales value in Box 6 (total sales) on your VAT return.

• Don’t include VAT in Box 1.

You must double-check that your customer is VAT-registered, and in sectors such as construction, confirm whether they’re the user. This will determine whether the reverse charge applies.

If you’re the customer

• Calculate the VAT as if the supplier had charged it, and apply the VAT rate yourself.

• Add it to two boxes on your VAT return: Box 1: VAT due (output tax) and Box 4: VAT reclaimable (input tax, if you’re eligible).

• Include the net purchase value in Box 7.

Where the customer is fully VAT-recoverable, the VAT entries cancel out, though accounting must still happen and be visible to HMRC.

What are common compliance errors, and how can businesses avoid them?

The reverse charge is simple in theory, but it introduces opportunities for error if your processes or tooling don’t capture the details.

Here’s where things often go wrong:

Charging VAT when you shouldn’t

This happens frequently in construction where user rules matter. If the VAT is charged incorrectly and reclaimed, HMRC might require both parties to correct their returns. Clear checks on customer status prevent this.

Not applying the reverse charge

Customers sometimes overlook overseas services and don’t submit a VAT declaration. HMRC can later assess the VAT, interest, and penalties. Assume overseas B2B services are subject to the reverse charge, unless you know otherwise.

Putting figures in the wrong VAT return boxes

Errors such as putting purchase values in Box 6 instead of Box 7 are common. A standardized checklist keeps returns consistent.

Crossing the registration thresholds

Unregistered businesses sometimes purchase enough reverse charge services to exceed the VAT registration threshold without realizing it. Because these purchases count toward the £90,000 threshold, they must be tracked. Maintaining good systems and clear invoice checks make reverse charge compliance much easier.

How Stripe Invoicing can help

Stripe Invoicing simplifies your accounts receivable (AR) process—from invoice creation to payment collection. Whether you’re managing one-time or recurring billing, Stripe helps businesses get paid faster and streamline operations:

• Automate accounts receivable: Easily create, customize, and send professional invoices—no coding required. Stripe automatically tracks invoice status, sends payment reminders, and processes refunds, helping you stay on top of your cash flow.

• Accelerate cash flow: Reduce days sales outstanding (DSO) and get paid faster with integrated global payments, automatic reminders, and AI-powered dunning tools that help you recover more revenue.

• Enhance the customer experience: Deliver a modern payment experience with support for 25+ languages, 135+ currencies, and 100+ payment methods. Invoices are easy to access and pay through a self-serve customer portal.

• Reduce back-office workload: Generate invoices in minutes and reduce time spent on collections through automatic reminders and a Stripe-hosted invoice payment page.

• Integrate with your existing systems: Stripe Invoicing integrates with popular accounting and enterprise resource planning (ERP) software, helping you keep systems in sync and reduce manual data entry.

Learn more about how Stripe can simplify your accounts receivable process, or get started today.