The reverse charge on your VAT return, box by box

What does the supplier put on the VAT return?

The net value of the sale in box 6, and no VAT in box 1, because you did not charge any. The work still counts as a sale.

• Box 1: Nothing for this job. You did not charge VAT, so there is no output tax to declare on it.
• Box 6: The net value of the sale, as for any other job.

Source: VAT reverse charge technical guide, which says Suppliers must not enter any output tax on sales under the reverse charge and The supplier only needs to enter the net value of the sale.

Whether the reverse charge applies to a job at all is covered in our VAT reverse charge guide.

What does the customer put on the VAT return?

The VAT the supplier did not charge goes in box 1, the same amount goes in box 4, and the net value of the work goes in box 7. HMRC’s guidance says: you must add the VAT charged to the output tax total on your VAT Return.

• Box 1: The VAT the supplier did not charge, as if you had charged it yourself.
• Box 4: The same VAT again, reclaimed as input tax under the normal rules.
• Box 7: The net value of what you bought, as with any other purchase.

Source: VAT Notice 700/12, paragraph 4.6, which tells the customer of building and construction services to fill in box 1 (output VAT), box 4 (input VAT) and box 7 (purchase value).

If you can reclaim all your VAT, box 1 and box 4 cancel out and you pay nothing extra. HMRC’s manual describes this as thus producing a nil net effect. The guidance says You may reclaim the input tax on your reverse charge purchases, subject to the normal VAT rules, so if you are partly exempt, box 4 can be lower than box 1.

Does the reverse charge go in box 6?

For the supplier, yes. For the customer, no. HMRC’s guidance says: Do not enter the net value of the purchase as a net sale, and box 6 is the total value of sales and all other outputs excluding any VAT.

Box 6 is also missing from Notice 700/12’s list of the customer’s boxes above. HMRC’s own manual adds that the reverse charge procedure has no impact on the completion of boxes 6 (outputs) and 7 (inputs) of the VAT return.

This catches people out because services bought from abroad work differently. There the customer does fill in box 6 (value of the deemed supply). That does not apply to construction.

Reverse charge VAT return example

R. Doyle Groundworks invoices Kellett Construction Ltd £1,600 for groundworks under the reverse charge. The invoice shows £320 of VAT for the customer to account for but does not charge it. It is the same job as our reverse charge invoice example.

Here is what each business puts on its VAT return, assuming nothing else happened that quarter:

The supplier shows a £1,600 sale and no VAT. The customer declares and reclaims £320, so its net VAT for this job is nil, and the £1,600 sits in purchases, not sales.

Can you use cash accounting with the reverse charge?

Not for reverse charge work. HMRC says You cannot use the VAT Cash Accounting Scheme for supplies or services you buy or sell that are subject to the reverse charge. Your other sales and purchases can stay on it: You can continue to use the scheme for any supplies that are not subject to the reverse charge.

So reverse charge jobs go on the return by date, not by when the cash moves. For a reverse charge purchase, HMRC says You can account for this on the date you make the payment to your sub-contractor, unless they have issued you with a tax invoice beforehand, in which case you should account for the VAT using the date of the invoice.

How does the reverse charge work on the Flat Rate Scheme?

Reverse charge work is kept outside your flat rate calculation. HMRC says Reverse charge supplies are not to be accounted for under the scheme.

• If you buy reverse charge work, you declare the VAT and reclaim it on the same return, as any other customer would. Flat Rate Scheme users who receive reverse charge supplies will have to account for the VAT due to HMRC and recover it at the same time on the same VAT Return.
• If you sell reverse charge work, leave it out of the turnover you apply your flat rate percentage to. Flat rate users should exclude the value of those supplies from their Flat Rate Scheme calculation.
• It still goes in box 6. Notice 700/12 says for flat rate box 6: You should also include the value, excluding VAT, of any supplies accounted for outside the Flat Rate Scheme, which includes reverse charge sales.
• Work the two out separately. HMRC’s manual says to carry out the reverse charge VAT liability calculations separately from their Flat Rate Scheme calculation, and then combine the figures when completing their VAT return.

Source: VAT reverse charge technical guide, Flat Rate Scheme.

If most of your sales are now reverse charge, check the scheme still suits you. HMRC suggests weighing it up, given that under the scheme they cannot recover VAT incurred on purchases of materials and overheads.

What are the common reverse charge mistakes on a VAT return?

These are the ones HMRC’s own compliance manual deals with:

1. The customer reclaims in box 4 but leaves box 1 empty. Claim box 4 without box 1 and HMRC can assess the VAT with penalties and interest if appropriate. If the customer leaves out both the box 1 VAT and the box 4 reclaim, no tax is lost, but the return is still wrong. Put both in. Partly exempt businesses are an exception: they can owe VAT if input tax recovery is restricted (such as in the case of partially exempt businesses).
2. The supplier charges VAT when the reverse charge applies. Where the supplier has wrongly charged VAT on supplies within scope of the construction reverse charge, and input tax has been claimed by the customer, an assessment will have to be raised. The customer then has to get the VAT back from the supplier: They can only pursue recovery of any output VAT they wrongly paid to their supplier from the supplier directly, not from HMRC. The supplier would in turn be eligible to recover any overdeclared output tax by means of normal error correction procedures.
3. The customer puts the purchase in box 6. It belongs in box 7, as above.
4. Reverse charge work goes through cash accounting. It has to come out of the scheme and go on the return by date, as above.

Source: HMRC manual VATREVCON43000 and VATREVCON44000.

Whatever the mistake, HMRC’s guidance is plain: Any errors should be corrected as soon as possible.