Normally the seller charges and collects VAT. Under the reverse charge, that job flips to the buyer, who accounts for the VAT themselves. It is the rule in UK construction and many cross-border services.
The usual flow of VAT is intuitive: the seller adds it, the buyer pays it, the seller sends it to HMRC. The reverse charge turns that on its head. The seller adds no VAT at all, and the buyer takes on the job of accounting for it. It sounds strange until you see why it exists: to stamp out a particular kind of fraud, and it is now the default in UK construction.
In a normal sale, the supplier charges VAT, collects it from the customer, and pays it to HMRC on their VAT return. Under the reverse charge, the supplier leaves VAT off the invoice entirely and adds a note such as "reverse charge: customer to account for VAT to HMRC." The customer then does two things on their own return:
For a fully taxable business, those two entries net to zero, so no actual cash moves for the VAT. The point is not to collect more tax but to remove the opportunity for fraud. Because the supplier never handles the VAT, they cannot collect it and then vanish without paying HMRC, the so-called missing trader fraud the rule was built to stop.
The most widely encountered version is the domestic reverse charge for building and construction services, in force since 1 March 2021. It applies where all of the following are true: the supply is of construction services within the scope of the Construction Industry Scheme, both parties are VAT-registered, the supply is standard or reduced-rated, and the customer is not an end user.
In practice this means a VAT-registered subcontractor invoicing a VAT-registered contractor does not charge VAT. The contractor accounts for it. Only when the work reaches an end user, typically the property owner, does normal VAT charging resume up the chain.
Marek is a VAT-registered electrician working as a subcontractor for a VAT-registered main contractor on a commercial fit-out. He invoices £8,000 for his labour and materials.
Marek's invoice (subcontractor):
| Item | Amount |
|---|---|
| Construction services | £8,000 |
| VAT (reverse charge applies) | £0 |
| Total charged | £8,000 |
He notes on the invoice that the reverse charge applies and that the contractor must account for VAT of £1,600 (£8,000 × 20%).
The contractor's VAT return:
| Entry | Amount |
|---|---|
| Output VAT (reverse charge) | £1,600 |
| Input VAT (reverse charge) | £1,600 |
| Net effect | £0 |
The contractor adds £1,600 to both their output and input VAT, which cancel out, so there is no net VAT cost or payment for this transaction. Marek simply receives £8,000 with no VAT, which affects his cash flow but not his profit. You can sanity-check the underlying VAT figures with the VAT calculator.
The reverse charge changes cash flow more than it changes tax. Subcontractors who once received the VAT element on every invoice, and could hold that cash until their return was due, no longer get it at all. For businesses that relied on that float, the 2021 change was a real adjustment. On the other side, contractors must remember to apply the reverse charge on their returns rather than paying VAT to subcontractors.
The most common mistakes are charging VAT when the reverse charge should apply (and vice versa), and failing to confirm the customer is VAT-registered and not an end user. Getting it wrong means correcting invoices and returns later. The reverse charge also appears in services bought from overseas suppliers, where a UK business self-accounts for VAT on imported services. In all cases, the same principle holds: the customer, not the supplier, reports the VAT.
The reverse charge does not change how much VAT is due. It changes who picks up the pen to account for it.
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