The reverse charge is a special VAT rule where the buyer, not the seller, accounts for VAT on a transaction. The seller invoices at 0% and notes that the reverse charge applies; the buyer self-accounts for output VAT and (usually) reclaims it as input VAT in the same return — a cash-neutral entry.
Where it applies
- Intra-EU B2B services — the default for services sold between businesses in different EU countries.
- Intra-EU B2B goods — when both parties have valid VAT numbers and the goods cross a border.
- Specific domestic sectors — UK construction industry (CIS), mobile phones and CPUs above certain thresholds, gas and electricity wholesale, scrap metal.
- Imports of services from outside the EU/UK into a VAT-registered buyer.
Why governments use it
Reverse charge eliminates missing-trader fraud (carousel fraud), where a seller collects VAT from the buyer and disappears before remitting it to the tax authority. By moving the obligation to the buyer, there is no VAT to steal.
What the invoice must show
- The buyer's VAT number, validated on VIES at the time of supply.
- A reference to the legal basis, e.g. "Reverse charge — Article 196 of Council Directive 2006/112/EC" for intra-EU services, or "Reverse charge: customer to pay the VAT to HMRC" for UK CIS.
- VAT amount shown as 0.00 with a clear note that VAT is to be accounted for by the customer.
- All the normal invoice content: sequential number, dates, descriptions, totals in the invoice currency.
How the buyer records it
In the buyer's VAT return:
- Add the notional VAT (at the buyer's domestic rate) to output VAT.
- Add the same amount to input VAT (if fully recoverable).
- Net cash impact: zero. But both sides must be reported — failing to declare the output VAT is one of the most common audit findings.
Common mistakes
- Applying the reverse charge without checking the buyer's VAT number is valid on the supply date.
- Charging local VAT to a foreign B2B customer who should have been reverse-charged — you owe the VAT but cannot easily reclaim from the customer.
- Forgetting to file the EC Sales List / Recapitulative Statement that reports reverse-charged sales.
- Treating B2C sales as reverse-charge — it never applies to consumers.
For a worked end-to-end example see How VAT works.