Guidance: Domestic reverse charge procedure (VAT Notice 735)

1. Overview

1.1 What this notice is about

The VAT domestic reverse charge procedure is an anti-fraud measure designed to counter criminal attacks on the UK VAT system by means of sophisticated fraud.

This notice explains the VAT reverse charge procedure, which applies to the supply and purchase of specified goods and services. It is not to be confused with the reverse charge for cross-border services, details of which are found in Place of supply of services (VAT Notice 741A).

For clarity we have inserted ‘domestic’ into the title of this notice as it’s often referred to as such and you should assume any other references to reverse charge in this notice are for the domestic one unless specifically indicated otherwise.

This notice also explains when the receipt of specified goods and services by a non-VAT-registered business makes it liable to be registered for VAT.

This notice assumes that you have a working knowledge of basic VAT principles, as outlined in the VAT guide (VAT Notice 700).

1.2 Who should read this notice

You should read this notice if you’re a VAT-registered business and you make supplies or purchases of the specified goods or services set out in section 3.

2.The law

The relevant law relating to the reverse charge on specified goods and services is set out in:

• section 55A of the Value Added Tax Act 1994 (as amended)

• sections 65 and 66 of the VAT Act 1994 (in relation to penalties with regard to the Reverse Charge Sales List (RCSL))

• regulations 23A-23D of Part IV of the VAT Regulations 1995 (in relation to the RCSL) (as amended)

• Value Added Tax (Section 55A)(Specified goods and services and excepted supplies) Order 2010SI 2010/2239 and amended by The Value Added Tax (Section 55A) (Specified Goods and Services etc) (Amendment) Order 2021 SI 2021/369

• Value Added Tax (Section 55A)(Specified Goods and Services and Excepted Supplies) Order 2014 SI 2014/1458

• Value Added Tax (Section 55A)(Specified Goods and Services and Excepted Supplies) Order 2016 SI 2016/12

• Value Added Tax (Section 55A)(Specified Services) Order 2019 SI 2019/1015

• Value Added Tax (Reverse Charge Sales Statements) (Revocation) Regulations 2022 SI 2022/548

3. Which specified goods and services the reverse charge applies to

3.1 Specified goods and services

The specified goods that the reverse charge applies to are:

• mobile phones with effect from 1 June 2007, read paragraph 3.3
• computer chips with effect from 1 June 2007, read paragraph 3.4
• wholesale gas with effect from 1 July 2014, read paragraph 3.5
• wholesale electricity with effect from 1 July 2014, read paragraph 3.5

The specified services are:

• emission allowances with effect from 1 November 2010 and amended with effect from 1 May 2021, read paragraph 3.6
• wholesale telecommunications 1 February 2016, read paragraph 3.7
• renewable energy certificates with effect from 14 June 2019, read paragraph 3.8
• construction services with effect from 1 March 2021 — read when you must use the VAT reverse charge for building and construction services

A reverse charge definition for each of these is set out in the following paragraphs.

3.2 What’s meant by ‘wholesale’

For wholesale supplies the reverse charge takes its normal meaning of being business to business supplies where the intention is to sell on the supply with no or negligible consumption of the supply by the businesses concerned.

3.3 Mobile phones

3.3.1 The UK definition of a mobile phone and what’s covered

For the purpose of the reverse charge, the definition of a mobile phone takes its everyday meaning in the UK. Generally this means any handsets which have a mobile phone function (that is, sending and receiving spoken messages over a cellular network), whether or not they’ve any other functions.

A device is also a mobile phone if it falls within 8517 11 00 or 8517 12 00 of annex I to Council Regulation 2658/87 on the Tariff and Statistical Nomenclature and on the Common Customs Tariff (as amended).

The reverse charge also covers:

• mobile phones supplied with accessories (such as a charger, battery, cover or hands-free kit) as a single package

• pre-pay (or ‘pay as you go’) mobile phones, (whether or not the selling price includes an element to cover the cost of future use of the phones) and mobile phones locked to a network but not supplied with a contract for airtime

• smart watches with a mobile phone function that are not paired to a mobile phone

3.3.2 What’s not covered

The reverse charge does not apply to the following:

3.4 Computer chips

The terminology surrounding computer chips can be confusing. As a guide, all computer chips covered by the reverse charge fall within commodity code 8542 3190 00.

The term covers:

• small integrated circuit (that is, Central Processing Units or CPUs)
• discrete integrated circuit devices, that is:
• microprocessors or microprocessor units (MPUs)
• microcontrollers or microcontroller units (MCUs)
• chipsets, the dedicated cluster of integrated circuits which support MPUs

The reverse charge applies to such items when they’re in a state prior to integration into end-user products, or where they’re sold separately and not as part of an assembled item, for example a motherboard.

Items such as computer servers, laptops, desktop units or tablets are excluded from the scope of the reverse charge.

3.5 Gas and electricity

3.5.1 What’s covered

Subject to certain exceptions (read paragraphs 3.5.2 and 3.5.3), the reverse charge applies to all wholesale supplies of gas and electricity between counterparties established in the UK.

This means wholesale supplies between UK counterparties under trading contracts (for example European Federation of Energy Traders contracts, Grid Trade Master Agreements and National Balancing Point contracts) and over the counter or spot contracts of gas, where it’s gas supplied through a natural gas system situated within the UK or any network connected to a natural gas system in the UK, or electricity.

Examples of specific supplies or charges covered by the reverse charge are:

• balancing mechanism imbalance settlement charges, and other gas balancing or gas reconciliation charges
• services supplied under a wholesale or trading contract that are ancillary to the supply of gas or electricity
• gas loaded onto road trucks and delivered at a flange linked to liquid natural gas storage facilities, that is, the gas is still within the natural gas system or a network connected to it
• shipper to shipper metering correction charges where the consumer has changed supplier

Supplies to power stations and combined heating and power plants will only be included in the reverse charge where they’re made by way of trading rather than for consumption only.

3.5.2 What is not covered

The reverse charge will not apply to supplies of gas and electricity made under supply licence or metered arrangements to domestic and business premises (supplies for consumption). VAT-registered businesses that do not resell or trade the gas or electricity will not be affected.

Unless the supply is incidental to a reverse charge supply, read paragraph 7.2, the reverse charge will not apply to supplies:

• of Liquified Natural Gas delivered ‘ship-to-ship’
• of natural gas liquids (ethane, propane butane and condensate) sold separate to the sale of gas
• made by an accredited feed in installation
• currently zero-rated, for example trades on terminal markets
• to third party intermediaries and directed utilities for consumption by the directed utility or onward supply by the directed utility to an end user for consumption
• that are contracted for separately from wholesale supplies of gas and electricity, for example transportation services and of biomethane where they’re from a production plant with a registered capacity of no more than 4,000 metres cubed per hour

Further examples of specific supplies or charges not covered by the reverse charge include:

• distribution use of system charges
• transmission network use of system charges
• metering rental charges
• data collection charges
• balancing system use of system charges
• interconnector capacity charges
• gas storage charges
• gas network system charges
• payments made in respect of constraint contracts with National Grid
• balancing and settlement code charges (Elexon market operator charges)
• Levy Exemption Certificates traded separately from the underlying electricity
• Renewable Obligation Certificates (ROCs) traded separately from the underlying electricity — read paragraph 3.8 for the reverse charge for ROCs traded separately
• fees for exchange related settlement for example N2Ex fees
• option premiums

This is not a full list.

3.5.3 Electricity supplied under a Power Purchase Agreement (PPA) or similar agreement

Sales of electricity made under a PPA or similar agreement may or may not be subject to the reverse charge depending on their wholesale features.

Electricity sold under such an agreement will not be regarded as wholesale and so will not be subject to the reverse charge where all of the following apply:

• the seller of the electricity is a generator who’s exempted from holding a generating licence

• the generation capacity by asset is 100 megawatts or less

• the generated volume is not allocated to the generator’s production account with Elexon (or the generator account with the Single Electricity Market Operator (SEMO) in Northern Ireland)

Similarly, if your generated power is sold under a PPA or similar agreement to the NFPA, NFPA Scotland Ltd or NFPA Services Ltd and the generated power is not allocated to your production account with Elexon or generation account with SEMO, that power is excluded from the reverse charge.

The sale of the power by the NFPA by auction is also excluded from the reverse charge.

3.6 What’s meant by ‘emissions allowances’

Only those compliance market credits which can be used to meet obligations under the EU Emissions Trading Scheme (EUETS) are subject to the reverse charge mechanism.

These currently comprise of EU Allowances, as defined in Directive 2003/87/EC (as amended). Some Certified Emission Reductions (CERs) and some Emission Reduction Units (ERUs), as defined in the Directive, were also were subject to the reverse charge.

As from 1 May 2021, these CERs and ERUs are no longer within the reverse charge.

At the beginning of 2021 a new UK Emissions Trading Scheme (UKETS) was introduced. This broadly follows the EUETS and an amendment was made to the scope of the reverse charge so that it applies to UK allowances from 1 May 2021.

3.7 Telecommunications services

3.7.1 What’s covered

Subject to certain exceptions, read paragraph 3.7.2, the domestic reverse charge will apply to all wholesale supplies of telecommunications services, including satellite services between counterparties established in the UK.

This will typically mean transmission or carriage services of airtime and telephony related data.

The reverse charge will cover telecommunications services which enable speech communication instantly or with only a negligible delay between the transmission and the receipt of signal or the transmission of writing, images and sounds or information of any nature when given in connection with these services.

This table gives examples of telecommunications services covered by the reverse charge. This is not a full list.

Name of service	Description	Notes
Airtime	Mobile telephony usage, including roaming agreements	Not applicable
Voice interconnect	The services of handling calls for other operators	Not applicable
Voice Over Internet Protocol (VOIP)	Charges for voice calls sent over the internet	Not applicable
Termination charges	The service of terminating calls to the destination number	Not applicable
Short Message Service (SMS) hubbing	Wholesale SMS transit services (through a hubbing arrangement)	Not applicable
SMS interworking	The service of handling SMS for other operators	Not applicable
Wholesale SMS or Multimedia Messaging Service (MMS)	Charges for SMS or MMS usage.	For example, a supply made from a Mobile Network Operator (MNO) to a Mobile Virtual Network Operator (MVNO).
Bulk SMS or MMS	Bulk sale of SMS messages for advertising and consumer notification purposes, contact with customers	This is the sale of large quantities of SMS to a business end user for example a bank wanting to send SMS messages to its customers. The network operator terminates the messages on their own or other interconnected networks.
Wholesale Over The Top (OTT) services (for example, Whatsapp)	Wholesale charges for OTT data services, such as Internet Protocol (IP) based messaging	Not applicable
Follow me services	Call forwarding service allowing subscribers to be reached using any of multiple numbers	The Follow Me service is a service that a telco would sell to aggregators who then on-sell to customers. It might be used to give a service to customers placing adverts in trading magazines, for example, whereby a mobile number is quoted that is not the private number of the person placing the advertisement. Any calls to the number quoted are forwarded to the private contact number.
Location services or Network location services	Location services is a telecoms network based product where the SIM card (thus the handset or device) registers on 3 or more cell sites in a cellular network and the site calculates the field strength of the devices signal. This information can be used to convert the three cell sites location and the field strength into a geographical position of the SIM card.	Not applicable
App based location services	Mobile handset Apps can transmit their geo location to the App provider using data or SMS. The app provider may be charged by the network for enabling the functionality and relaying the SMS or data.	If this is a supply of a business service and is designed for receipt of consumer initiated messages (through the App) and the consumer has paid VAT on message sent or data or bundle then it’s outside the scope of the reverse charge. The App based location service (where the App stimulates the sending of location) uses in this instance standard retailed data or messaging services to both businesses and consumers.
Home Location Register (HLR) look-up services	Service of checking the status of mobile number in terms of activity and location	The HLR look-up service relates to the service given by a mobile network operator to check the status of a mobile number.
Big Mobile or Long Number SMS	Resale of telecoms services to aggregators, often to enable over the air updates, sometimes through SMS	Long number SMS is the facility to get (at scale) SMS messages and is used by businesses to open a communication channel to customers (as an alternative to say twitter or email). Example usage may be to gather product feedback from consumers. This is the corollary of bulk SMS (just in this case paying for inbound SMS rather than paying for outbound SMS in the bulk SMS scenario). In both cases, it’s clearly a supply of telecoms being provided.
Services for television, online, radio and media (STORM)	A communications integration service including telecoms usage charges	Not applicable
Machine 2 Machine (M2M)	M2M connectivity services	Not applicable
System integrator services	Telecoms services provided to system integrators for onward sale within a ‘service wrap’	Not applicable
Session Initiation Protocol trunking	VOIP and streaming media service based on the Session Initiation Protocol	Not applicable
Voice to text for the hard of hearing	Service converting voice messages to text	Not applicable
Call routing services	The service of routing a local call to an alternative destination	In relation to call routing, this is usually an enterprise solution whereby a telco would charge business customers for the service of routing traffic which has come through on a local number to, for example, an Indian call centre. The customer calling the local number pays a local charge, and the business customer picks up the bill for the routing to India.
Monthly Recurring Charge (MRC or line rental)	MRC, or line rental fee	Includes MVNO charges, Independent Service Providers and charges to fixed line resellers
Fixed line rental	Voice capable line rental fee for fixed line services	Not applicable
Mobile voice, SMS and data storage charges	Not applicable	Not applicable
Fixed voice usage charges	Not applicable	Not applicable

3.7.2 What’s not covered

This table gives examples of telecommunications services not covered by the reverse charge. This list is not a full list.

Name of service	Description	Notes
Data interconnect	Service of providing a pre-provisioned access point between two networks for data	Not applicable
Analytics	Any kind of data analytics, not directly involving a telecoms service	Not applicable
Vouchers (single and multi-purpose)	Supplies where Schedule 10A of the VAT Act 1994 (face value vouchers) applies	Not applicable
Sale or usage of premium number ranges	Charges for the use of certain premium number ranges (for example 0845, 0300)	Not applicable
Revenue share in relation to use of premium numbers owned by the telco	Payout made in relation to the volume of calls made to premium number ranges	Not applicable
Premium rate voice services (including service fee for 118, 09 services)	The supply by an aggregator to a telco of a premium voice service, the telco supplies onward to the customer. Consumers are able to buy goods or services by calling a higher rated number connected to third parties. The charge is applied as a telecoms charge to the consumer and includes VAT. The third party will get a new payment after VAT and transit charge taken off	This is predominantly a payment service
Premium rate SMS services	As with Premium rate voice services for premium rate voice.	This is predominantly a payment service
Short code flat fees, Network User Address (NUA), connection and other fees connected with Premium SMS or voice or Voice short codes	Consumers are able to buy goods calling a higher rated 5 to 7 digit number connected to third parties. The charge is applied as a telecoms charge to the consumer and includes VAT. The third party will get a net payment after VAT and network charges taken off	This is predominantly a payment service
Charity texts	The service of allowing donations to 70XXX SMS short codes, this is already treated as outside the scope of VAT	Not applicable
Direct operator billing, known as Charge To Bill, Charge To Mobile and Carrier Billing	Service of allowing a charge for content to be billed by a telco operator, on behalf of the content provider.	This is a payment service and has strong parallels to credit card and emoney type facilities
Installation services	Not applicable	Not applicable
Repair services	Not applicable	Not applicable
Broadband or internet access	Flat or usage charges for connection to the internet including Asymmetric Digital Subscriber Line (ADSL)	Not applicable
Leased line	Rental of a telecommunications line between two or more locations, also known as a private circuit or data line	Not applicable
Indefeasible Right of Use (IRUs)	The right to use capacity of a telecoms network	Not applicable
Dark fibre	The service of leasing unused fibre optic cable to other companies who then establish their own optical connections	Not applicable
Lit fibre	The service of access to fibre cable which already has equipment installed to send communications traffic	Not applicable
Transport or capacity and related access services	Not applicable	Not applicable
Wholesale line rental (WLR)(capacity based)	Not applicable	Often billed with usage
Public Switched Telephone Network (PSTN) services	Charges for use of a PTSN network	Often billed with usage
Carrier Pre-Selection Services (CPS)	The service of pre selecting a carrier to which calls will be routed, for example a customer may choose different carriers for national and international calls.	Not applicable
Metallic Path Facility (MPF)	Not applicable	Not applicable
IP Exchange (IPX) services	An IP based technology for a telecoms interconnection model	Not applicable
Multi-Protocol Label Switching (MPLS)	A technology for the provision of voice and data services	Not applicable
Port rentals	Rental charge for use of IP connection ports	Not applicable
Speaking clock rentals	Capacity charge related to speaking clock	Not applicable
Co-location services	Co-location services refer to the provision of space within, or the right to use, the facilities of a data centre.	Not applicable
Cloud and hosting services	Not applicable	Not applicable
Enterprise value added services	These are additional telecoms services including bill monitoring, spend management, call recording	Not applicable
Interactive Technology Services	The provision of a managed software platform for mobile service creation and billing	This is the provision of a platform or software and not the transmission of calls or related data and so not covered by the reverse charge
Integrated platform services	The provision of a managed software platform for mobile service creation	This is the provision of a platform or software and not the transmission of calls or related data
Signalling platform services	The provision of a managed software platform for mobile service creation	The software platform enables the user give mobile services to their clients
Virtual Visitor Location Register (VLR) service	Provision of software to enable inbound roaming services.	This refers to the provision of software that allows someone else to give global roaming services
Service fee for site to site virtual private networks (VPNs), virtual access points (APNs) for Springboard Apps	These are charges infrastructure or connectivity	Not applicable
Remote access client VPN connectivity	Network or infrastructure fee	Not applicable
Signalling Gateway services including CAMEL and SMS-C	The provision of managed software platform for mobile service creation	Not applicable

In addition, the following are also not covered by the reverse charge:

• indefeasible right of use charges

• supplies to a member of a corporate group for onward supply within that corporate group, and where the corporate group members consume that supply

• the return of unused minutes that were not originally subject to the reverse charge

3.8 What’s meant by ‘renewable energy certificates’

These certificates are commonly called ‘Guarantees of Origin’ (GoOs) and are also known as:

• Renewable Energy Certificates (RECS)
• Renewable Obligation Certificates (ROCS)
• Renewable Energy Guarantee of Origin (REGO)
• International Renewable Energy Certificates (I-RECS)
• Renewable Gas Guarantees of Origin (RGGOs)

This list is not a full list.

3.8.1 What’s covered

Subject to paragraph 3.8.2, the domestic reverse charge will apply to all supplies of these types of certificates. This means purchases and sales of certificates between businesses that are registered or liable to be registered for VAT in the UK.

3.8.2 What’s not covered

Where certificates are supplied as part of a power contract, agreement etc (such as a Power Purchase Agreement), then the supply of the certificates is subsumed into the supply of the power and the overall supply is treated as a single supply of power.

In these circumstances, the renewable energy certificates reverse charge does not apply. This is still the case where the power and the certificates are invoiced separately and at different times. However, you should read paragraph 3.5.3 to check if the gas and electricity reverse charge applies.

Some businesses may purchase and sell certificates that are both connected and not connected with a power contract or agreement.

The issuer of invoices for certificates can include (or contracting parties may want to agree between them) wording to go on the invoices that distinguishes between certificates that are connected with power and those that are not.

For example, where (i) the certificates are connected with a supply of power and (ii) that power is not subject to the separate gas and electricity reverse charge in paragraph 3.5, then the wording on the certificates invoices could be either:

There is no legal need to include any form of wording to make the distinction. These are only suggestions and other wording can be used.

Where the connected power is subject to the gas and electricity reverse charge in paragraph 3.5, then there is a legal requirement to include a reference to the reverse charge on the invoices for certificates (read paragraph 7.6).

Where the certificates are not connected with power but are still covered by the renewable energy certificates reverse charge in paragraph 3.8.1, those invoices will also need the reverse charge wording (read paragraph 7.6).

4. Other supplies excluded from the reverse charge

Supplies of specified goods or services in the following circumstances are always excluded from the reverse charge procedure:

• supplies to businesses not registered and not liable to be registered for VAT
• supplies to customers for non-business use
• supplies for final consumption
• non-wholesale supplies in respect of gas, electricity and telecommunications services
• supplies for which the seller chooses to use the second-hand margin scheme, further details of this can be found in using the global accounting VAT margin scheme
• cross border transactions of specified goods and services, read Place of supply of services (VAT Notice 741A
• specified goods and services which a business gives away for no consideration, these may be deemed supplies on which the supplier is required to account for VAT, further information can be found in Business promotions (VAT Notice 700/7)

5. How the reverse charge works

The reverse charge only applies to the sale and purchase of the specified goods and services listed in section 3:

• between UK taxable persons
• for mobile phones and computer chips, where the VAT-exclusive value of the supply is above the de minimis limit, section 6 and where the goods and services are bought and sold for business use

It’s the responsibility of the customer, rather than the supplier, to account to HMRC for VAT on supplies of the specified goods or services, for example:

• ABC Ltd, a VAT-registered distributor, sells a quantity of mobile phones to 123 Ltd, a VAT-registered retailer, for a VAT exclusive value of £6,000
• ABC Ltd does not charge VAT on the supply, specifying on its invoice that the reverse charge applies, read paragraph 7.6 about invoicing procedures
• 123 Ltd will account for ABC Ltd’s output tax but will reclaim the exact same amount as input tax

If you’re selling specified goods and services you’ll find guidance in section 7 and section 9.

If you’re buying these specified goods and services you’ll find guidance in section 8.

6. The de minimis rule for mobile phones and computer chips

6.1 General

The de minimis limit only applies to supplies of mobile phones and computer chips, it does not apply to supplies of gas, electricity, emissions allowances or telecommunications services, no matter what the value. The effect of the de minimis is to exclude supplies of mobile phones or computer chips with a VAT exclusive value below £5,000.

The de minimis limit is calculated on an invoice basis, that is, the reverse charge applies if the total VAT exclusive value of all the mobile phones or computer chips supplied on an invoice is £5,000 or more. In that event, the reverse charge applies to the total value of the mobile phones or computer chips on that invoice. There is no exclusion for the first £5,000.

But there are specific circumstances when the total value of individual invoices will determine if the reverse charge should be applied. This is dealt with in paragraph 6.3 and paragraph 6.5.

6.2 If you make mixed supplies

Since the de minimis limit only applies to mobile phones and computer chips you’ll have to separate these supplies out for the purposes of applying the de minimis limit. Most suppliers put their reverse charge supplies on separate invoices as it’s clearer who has to account for the output tax.

If an itemised invoice relates to a single supply, for example a computer, which is not subject to the reverse charge, VAT should be charged as normal on the supply, even if some of the itemised components are reverse charge goods.

6.3 If you issue multiple invoices in relation to a single purchase order

In many business to business transactions, several separate invoices may be issued in relation to a single purchase order, for example, a separate invoice for each delivery which when totalled, satisfies the single purchase order.

Where the single purchase order value is larger than the individual invoice value, you can apply the reverse charge to all invoices relating to the single purchase order so long as both the purchase order value exceeds the £5,000 threshold and both parties agree.

But where a single invoice is issued for a supply, then, as normal, the total VAT-exclusive value of the invoice should be reviewed to determine if the de minimis applies.

6.4 Unconditional and contingent discounts or delayed reductions in price

Where VAT is due on a value reduced by an unconditional discount then use the discounted value to establish the value for the purpose of applying the de minimis rule. But where there are contingent discounts or a delayed reduction in price, use the full value shown on the invoice.

Further information on the definition of these discounts can be found in VAT guide (VAT Notice 700).

6.5 Disaggregation

Where you wholesale mobile phones or computer chips and believe that your customer is seeking to disaggregate the supplies you’ll find guidance in paragraph 9.3.3.

7. If you make a reverse charge supply

7.1 General

The reverse charge only applies to supplies where:

• those supplies are specified supplies of goods or services as set out in section 3
• your customer is registered or liable to be registered for UK VAT
• your customer is buying the goods or services for a business purpose
• in the case of mobile phones or computer chips, the VAT exclusive value of any specified goods is above the de minimis limit, read paragraph 6.3 and paragraph 6.5

7.2 Incidental and bundled supplies

7.2.1 Incidental supplies

Where the supplies are incidental to a reverse charge supply then they’ll also be subject to the reverse charge.

7.2.2 Bundled supplies

There may be supplies which contain a mixture of reverse charge and non-reverse charge supplies and it’s impossible or impractical to separate out the element subject to the reverse charge.

To make sure the reverse works effectively to prevent the fraud it will be acceptable for the reverse charge to apply to the whole supply. However, this does not apply when power and renewable energy certificates are supplied together (read paragraph 3.8.2).

7.3 If you sell specified goods or services to a business not based in the UK

The rules and procedures for sending goods to a customer outside the UK are unaffected by the reverse charge.

7.4 If you are unsure if your customer is a VAT-registered business

If you’re selling goods or services under the reverse charge procedure you need to obtain your customer’s VAT registration number and satisfy yourself, as far as possible, that the number is genuine and the goods or services are being bought for a business purpose. Section 9 gives guidance about the checks you should undertake for this purpose.

7.5 Sales to non-VAT-registered customers

Where you make a supply of specified goods or services to a customer who is not VAT-registered or is not liable to be registered for UK VAT the reverse charge procedure does not apply. In such instances VAT should be applied in the normal way.

7.6 Invoicing

7.6.1 Paper invoices

Under the VAT Regulations 1995, invoices for reverse charge supplies, when the customer is liable for the VAT, must include the reference ‘reverse charge’.

The following examples fulfil the legal requirement:

• reverse charge: VAT Act 1994 Section 55A applies
• reverse charge: S55A VATA 94 applies
• reverse charge: Customer to pay the VAT to HMRC

When making a sale to which the reverse charge procedure applies, you must show all the information normally required to be shown on a VAT invoice and must also include a reference on the invoice to make it clear that the reverse charge applies and that your customer is required to account for the VAT.

Unless otherwise agreed with HMRC, the amount of VAT to be accounted for under the reverse charge should be clearly stated on the invoice but should not be included in the amount shown as total VAT charged.

If you produce invoices using an IT system, and that system cannot show the amount to be accounted for under the reverse charge, then the wording should state that VAT is to be accounted for by your customer at the standard rate of VAT, based on the VAT-exclusive selling price for the reverse charge goods or services.

But your customer must be able to identify the reverse charge goods or services, and a legend such as ‘customer to account to HMRC for the reverse charge output tax on the VAT-exclusive price of items marked reverse charge’.

7.6.2 Electronic invoices

HMRC will allow the use of electronic invoices that use a coded representation rather than textual form as long as the content can be demonstrated to an HMRC auditor by both parties to the electronic invoicing exchange.

This is subject to the agreement of both parties.

7.7 Completion of your VAT return

Where you make a reverse charge supply you must include the VAT exclusive value of that supply in the total value of sales in box 6 of your VAT return. There is no output tax to include in box 1, because that is the responsibility of your customer.

7.8 Completion of the Reverse Charge Sales List (RCSL)

With effect from 1 July 2022, where you’ve made a reverse charge supply of mobile phones or computer chips, you no longer need to complete a Reverse Charge Sales List. However, the reverse charge still applies for supplies from 1 July 2022.

You will also still need to submit a Reverse Charge Sales List with your VAT return that includes the period up to the end of June 2022, read paragraph 11.4.1. You will need to do this before 17 October 2022.

8. If you get a reverse charge supply

8.1 General

If you’re a UK VAT-registered business, or are liable to be registered for UK VAT, and have not been charged VAT because the reverse charge procedure applies, you must account for the VAT due on the supply.

The amount of VAT should be shown on the VAT invoice issued by your supplier, read paragraph 7.6.

You must account for the VAT on the VAT return for the period in which you got the supply. The normal tax point rules apply for determining when the supply is made and received.

You may reclaim this VAT as input tax on the same return as it’s accounted for, subject to the normal rules, including any partial exemption restriction that may apply, read paragraph 8.5.

8.2 Onward sales of specified goods and services bought under the reverse charge

If you buy specified goods or services subject to the reverse charge and then sell them to another UK VAT-registered business, or a business that’s liable to be registered for UK VAT, and, in the case of mobile phones or computer chips only, the VAT-exclusive invoice value of the goods is £5,000 or more, read section 6, then the reverse charge applies to the onward sale, read section 7and section 9.

If the goods or services are sold in any other circumstances, then the appropriate normal VAT accounting rules for the transaction must be followed.

8.3 If you are not registered for VAT but buy specified goods and services

If you’re in business but are not VAT registered you may need to consider if buying specified goods and services makes you liable to be registered for VAT.

8.3.1 For mobile phones and computer chips

If you make individual purchases of mobile phones or computer chips for a VAT exclusive value of £5,000 or more you have to include these amounts when considering if the value of your taxable supplies has exceeded the VAT registration threshold. But the first £1,000 of such purchases per month is disregarded, so if you do not buy specified goods above this amount you’ll not have to take them into account.

So the total value of purchases to which the reverse charge would apply in excess of £1,000 per month does count, along with your other taxable supplies, towards your liability to register for VAT.

For example, if you buy a total of £5,000 in a month £4,000 is to be taken into account. That value should be included both in calculating the value of taxable supplies in the previous 12 months or less, and in the expected value of taxable supplies in the next 30 days alone, for the purpose of applying these tests for liability to register for VAT.

8.3.2 For gas, electricity, emissions allowances, telecommunications services and renewable energy certificates

Unlike for mobile phones and computer chips, there is no £5,000 de minimis limit.

So when buying gas, electricity, emissions allowances, telecommunications services or renewable energy certificates you must consider these amounts, no matter what the value, when considering if your taxable supplies have exceeded the VAT registration threshold. Although, the first £1,000 of such purchases per month is disregarded.

So if you buy gas, electricity, emissions allowances, telecommunications services or renewable energy certificates below £1,000 each month you will not have to take them into account.

But the total value of purchases to which the reverse charge would apply in excess of £1,000 per month does count towards your liability to register for VAT.

That value should be included both in calculating the value of taxable supplies in the previous 12 months or less, and in the expected value of taxable supplies in the next 30 days alone, for the purpose of applying these tests for liability to register for VAT.

When applying these tests for liability to register for VAT, that value should be included in both:

8.4 If you get goods or services within the reverse charge categories from someone who is not based in the UK

If you get goods and services or both that fall into a category specified for domestic reverse charge purposes, from non-UK taxable persons located outside the UK, the domestic reverse charge will not apply.

But if you then supply those goods or services you’ll find guidance in section 7, paragraph 8.2, and section 9.

8.5 Completion of your VAT return

You must enter the output tax payable on purchases under the reverse charge in box 1, but the VAT exclusive value of the purchases must not be entered in box 6.

Input tax may be reclaimed, subject to the normal rules, by including it in the total shown in box 4. The VAT exclusive value of the purchases should be entered in box 7 in the normal way.

8.6 Failure to comply with the reverse charge procedure

Failure to apply the reverse charge may arise as an oversight or where you’ve been unable to give your supplier a VAT registration number because you’re still waiting for a number from HMRC.

Where you do not account for the reverse charge when you should, it’s possible that you could be assessed for your supplier’s output tax, which you should have entered on your own VAT return. You might also incur penalties and interest.

Given that the reverse charge is there to prevent VAT being stolen in the supply chain, if you do not notify your supplier that the reverse charge should be applied will be viewed by HMRC as suspicious. If you take no action to correct the situation when the reverse charge should apply you may put yourself in a position where:

• you lose your right to deduct input tax unless you account for the reverse charge output tax
• you could be held to be jointly and severally liable for any VAT loss elsewhere in the supply chain
• if you knew or should have known that your transactions were connected with fraudulent evasion of VAT you’ll lose your right to deduct the input tax

9. Checks you should carry out on your customer

9.1 Introduction

If goods or services are eligible goods or services, or if mobile phones or computer chips are being sold in quantities above the £5,000 de minimis threshold, section 6 is something about which you, as the supplier, will have first-hand knowledge. But for the reverse charge to apply, the goods or services must also be sold to a taxable person for a business purpose, and you may not have first-hand knowledge of your customer or their VAT status.

This section gives you guidance as a supplier about the checks you’re expected to make. Paragraph 9.4 outlines the consequences of getting this wrong.

9.2 Retail sales

The reverse charge is only be applied on business to business supplies of specified goods and services. Whilst it covers both wholesale and retail supplies, most retail sales should be unaffected.

The checks suggested in paragraph 9.3.1 can be applied by retailers and internet traders but only for new or established relationships with business customers. There are fewer long term relationships with customers in the retail sector and so commercial checks and other checks to prevent fraud or money laundering may be more relevant. But there’ll be situations, for example repeat or pre-ordered bulk sales to business customers, where the checks in paragraph 9.3.1 will also be relevant to retailers and internet traders.

If you cannot carry out the necessary checks to satisfy yourself of your customer’s credentials and, in particular, that a VAT registration number which has been quoted belongs to that person, then VAT should be charged in the normal way. HMRC expect this to be the norm for most retail sales.

Where a customer is VAT registered but is trying to disaggregate its purchases to avoid the reverse charge, read paragraph 9.3.3 you should charge VAT in the normal way to avoid the risk of the tax not being accounted for properly.

Business customers buying in excess of £250 should request a full VAT invoice to prove any input tax claims. They should also note that some retailers have a strict policy on issuing amended invoices, and so you should ask for a valid VAT invoice at the time of purchase. Details of what constitutes a valid VAT invoice can be found in paragraphs 16.3 and 16.6 of the VAT guide (VAT Notice 700).

On supplies of specified goods or services to non-business customers, you should always charge VAT in the normal way.

For this paragraph (9.2):

• retail sales include internet sales where those sales are mainly geared to selling to non-business customers and where payment is generally demanded before the goods are sent or handed over

• where a business has both retail and non-retail parts of its business, this paragraph only applies to the retail part

A business, or part of a business, that only makes incidental retail sales is not classed as a retailer for the purposes of this paragraph.

9.3 Wholesale supplies

9.3.1 Reasonable checks

Paragraph 9.4 explains that you will not be held liable for incorrect application of the reverse charge where you’ve taken reasonable steps to establish the VAT status of your customer. What is reasonable in any case will depend on norms in the sector and the type of relationship you have with your customer.

The following are indicators to help you decide how far you should go before accepting a customer’s credentials.

They should not be taken as an exhaustive or definitive list:

• do commercial checks on creditworthiness and customer status suggest any reason to doubt your customer’s credentials

• is the VAT registration number genuine and does it belong to the person who is quoting it, you can contact VAT general enquiries to check (large businesses can contact their Customer Compliance Manager for advice)

• is this a new customer or a well-established business known to you, in general there is no need for you to carry out special verification of the VAT registration numbers of existing customers who you’ve an established trading relationship with

• is there any indication in the pattern of orders that your customer is attempting to disaggregate, read paragraph 9.3.3 their purchases of mobile phones and computer chips in order to circumvent the £5,000 de minimis

• have you any grounds to doubt the credentials of your customer

• are there features or circumstances that are out of the ordinary in respect of the transaction, if so, establish the reasons are credible

There is further advice in Joint and several liability for unpaid VAT (VAT Notice 726) relating to the integrity of a supplier and this applies equally to that of the customer.

You should keep evidence of the checks you’ve performed, so they can be shown to HMRC if asked.

9.3.2 If you have doubts about the credentials of your customers or their VAT status

If you cannot be satisfied of the credentials of your customer or the status of their VAT registration then you must consider if you should proceed with the transaction.

If you proceed with a reverse charge transaction where there are doubts that the reverse charge applies, you may want to consider asking your customer for a deposit equivalent to the output tax that they’ll become liable for if the reverse charge is applied in error.

This may be especially helpful if your customer has applied for but not yet got a VAT registration number. Any deposit taken in these circumstances can be refunded when they can show evidence that they’ve got their VAT registration number.

9.3.3 Disaggregation

Disaggregation is a term used to describe a situation where a person artificially arranges their purchases or sales in order to keep their values below the de minimus limit of £5,000 and so avoid having to apply the reverse charge.

If you’re a wholesaler or acting as a wholesaler, indicators that a customer may be seeking to disaggregate a supply of mobile phones or computer chips might include orders kept below the £5,000 de minimis limit for no obvious commercial reason.

For example several orders are made at the same time or within a short space of time when there’s no apparent reason why the customer would not have known the overall quantity needed at the outset.

Where you’ve undertaken reasonable checks, as outlined in paragraph 9.3.1, and you’re satisfied that your customer is VAT registered but is seeking to disaggregate, you should apply the reverse charge procedure.

Where you have reasonable doubts about if your customer is VAT registered but is seeking to disaggregate you must charge VAT at the standard rate.

9.4 Consequences of getting it wrong

If you apply the reverse charge and you’ve taken enough steps to check the credentials of your customer, but you’ve been deliberately misled by them, then you’ll not be required to account for output tax on the sale.

If you’ve correctly applied the reverse charge to a sale, then you’ll not be asked to account for output tax if your customer does not do so.

If you apply the reverse charge incorrectly or you’ve not taken enough steps to check the credentials of your customer, you’ll be liable to pay the output tax on the sale.

If you incorrectly charge VAT when the reverse charge should have been applied then your customer will be assessed for the output tax which will offset any entitlement to input tax recovery. You’ll then have to credit your customer with the VAT, returning any money collected as VAT. You’ll also be subject to the normal error correction procedures and possibly penalties.

10. Specific accounting issues

10.1 Adjustments in the course of business

Where a supplier offers a credit or contingent discount, if both parties agree the concession in paragraph 18.2.1 of VAT guide (VAT Notice 700), which allows both parties not to make VAT adjustments, the concession can be applied to reverse charge adjustments.

The complexities involved in making adjustments are likely to make this the easiest option, but the other methods are set out in paragraph 10.2 to 10.4.

Adjustments could be required, for example because of changes in price after the invoice has been issued, or because of returned goods.

The customer adjusts both their output tax and input tax accounts under regulation 38 of the VAT Regulations 1995 if:

• a supply is one to which the reverse charge procedure applies

• its value changes but, at its revised value, it remains within the reverse charge procedure and this change takes place after the prescribed accounting period of the customer in which the original supply took place

The supplier adjusts their output tax and the customer adjusts both their output tax and input tax accounts under regulation 38A of the VAT Regulations 1995 if:

• a supply is one that the reverse charge procedure applies to

• its value changes and, at its revised value, it’s outside the reverse charge procedure on mobile telephones and computer chips, and this change takes place after the prescribed accounting period of the supplier in which the original supply took place

In all circumstances, the object of the adjustment is to bring the correct amount of VAT to account.

10.2 Return not yet made

If as supplier or customer you identify a change in the value of reverse charge goods and services before your accounting period is closed, you can adjust your primary records of the sale or purchase and make sure the corrected figure feeds through to the VAT account.

10.3 Return already made and price adjustment removes the supply out of the reverse charge

If both parties agree, the original VAT treatment does not need to be reversed. If they do not agree, the supplier will need to bring output tax to account and collect the VAT due on the supply from their customer.

The customer will need to reverse the output tax they’ve entered and correct the input tax entry to reflect the corrected value. In this case, the whole of the original supply is credited and then re-invoiced by the supplier in the normal way, showing the VAT chargeable on the supply.

10.4 Credit and debit notes

Credit and debit notes record an adjustment to the original supply and their treatment depends on if the reverse charge applied in the first instance.

Suggested forms of words for credit notes where the reverse charge did apply are:

• reverse charge: customer to account for the output tax adjustment of -£X to HMRC

• reverse charge: UK customer to account for the output tax adjustment of -£X to HMRC

• customer to account to HMRC for the adjustment to reverse charge output tax on the VAT exclusive price of items marked reverse charge

Where the output tax liability reverts to the supplier as a result of a decrease in consideration, credit the whole supply and then the supplier should re-invoice in the normal way.

If using credit notes ‘reverse charge: customer to account for output tax adjustment of -£X to HMRC, supplier now accounts for £Y output tax to HMRC ‘ would also be acceptable.

10.5 Using the Payment on Account scheme (POA), how the reverse charge affects you

The POA regime requires businesses with a total VAT liability of £2.3 million or more in a period of 12 months or less, and tax periods exceeding 1 month to make monthly payments on account. As some businesses may be required to account for output tax on their purchases as well as on the onward sale to non-business customers, the reverse charge may have the effect of increasing their net VAT liability.

This can have the effect of bringing them within the scope of POA, or of increasing their monthly payments if they’re already within the regime.

The POA regime has been amended to allow affected businesses to apply to HMRC to exclude the output tax due under the reverse charge from the calculation to establish if a business is subject to POA or the monthly payments a business in POA has to make. Applications for such exclusion should be made to:

Some businesses may find that their net liability will decrease under the reverse charge. If that’s the case, then the normal rules outlined in paragraph 3.2 of VAT payments on account apply.

10.6 Bad debts

Bad debt relief does not apply with reverse charge supplies as it’s the customer who accounts for the tax. But where the customer has to adjust input tax recovery because part or all of the consideration is unpaid after 6 months (perhaps because of a disputed charge), then they may make a corresponding adjustment reducing the output tax accounted for.

10.7 Self billing

Under a VAT self billing arrangement it’s the customer who issues the invoice on behalf of the supplier for the supplies they’ve bought and had from the supplier. The reverse charge does not affect the self billing procedure itself. It’s the responsibility of the business issuing the self-billed invoice to apply the revised accounting procedure.

If the reverse charge applies then the buyer will be the person issuing the invoice and accounting for the VAT on the supply. The invoice should not charge VAT and should indicate that the buyer will be accounting for the VAT.

Suggested forms of words that can be included on a VAT self-billing invoice are:

• reverse charge: We’ll account for and pay output tax of £X to HMRC
• reverse charge: As the UK customer we’ll pay output tax of £X to HMRC

Alternatively, any of the following are also acceptable, as long as that the amount of VAT is shown elsewhere on the invoice (but not in the box for total output tax charged):

10.8 How the reverse charge affects accounting schemes

10.8.1 Flat Rate Scheme

Supplies that the reverse charge applies to are excluded from the Flat Rate Scheme. Any such supplies you’ve had and made should be accounted for under the reverse charge provisions.

10.8.2 Cash Accounting Scheme

Businesses using the cash accounting scheme should exclude sales and purchases that the reverse charge applies to from the scheme. These supplies should be accounted for under the reverse charge provisions.

But if a business buys goods and services that the reverse charge applies to and sells them on so that it does not (for example, under the de minimis rules or because the sale is to a non-business customer), then the onward sale should be dealt with under the cash accounting scheme.

10.8.3 Annual Accounting Scheme

The annual accounting scheme is unaffected by the reverse charge and can be used in the normal way with reverse charge supplies being accounted for within the scheme.

10.8.4 The Margin Scheme and global accounting

The Margin Scheme is one that businesses can elect to use for the sale of eligible goods. If you use it for eligible second-hand mobile phones and computer chips the reverse charge does not apply and the VAT payable is calculated under the margin scheme rules.

10.9 Specific cases

10.9.1 Charities and Local Authorities

These types of organisations may buy goods and services that the reverse charge applies to, which will be used partly for business purposes and partly for non-business purposes. In such cases, the reverse charge applies as normal. The customer should account for output tax under the reverse charge mechanism and apply the appropriate restriction to the deduction of the resulting input VAT.

10.9.2 National Health Service and Government Departments

Where supplies of goods and services subject to the reverse charge are made to the NHS and government departments for any element of business purpose then the reverse charge applies as normal. The customer should account for the VAT and restrict the recovery of the input tax as appropriate.

10.10 If you make a mistake

Mistakes made under the reverse charge procedure are to be dealt with in a similar way to other errors involving VAT. Read How to correct VAT errors and make adjustments or claims (VAT Notice 700/45).

11. The Reverse Charge Sales List

11.1 General

With effect from 1 July 2022, if you make supplies of mobile phones or computer chips, you are no longer required to notify HMRC and submit a regular Reverse Charge Sales List (RCSL) using the RCSL system.

You will still need to submit a RCSL for supplies of mobile phones or computer chips up to and including 30 June 2022. This means submitting a RCSL with your VAT return that includes the period up to the end of June 2022. You will need to do this before 17 October 2022.

If you make reverse charge sales up to and including 30 June 2022, you must notify HMRC and submit your RCSL using the RCSL system. Your accounts software may have the facility to export the required data, in the required format, for you. Alternatively you have the option to key the required information into VAT online.

From 17 October 2022, you will no longer be able to access the RCSL system to submit a RCSL or make any corrections.

11.2 When to notify HMRC

Within 30 days, you must tell us the date on which you first make a reverse charge sale. You must also give us the name and telephone number of a contact. If you then stop making such supplies, within 30 days, you must tell us the date that you stopped. But if later, you again make reverse charge sales, within 30 days you must tell us the date you restarted, and again give contact details.

If you do not notify us of an event in time you could be liable for penalties, which are calculated on a daily basis, read paragraph 11.5.

11.3 How the RCSL system works

The RCSL system is part of the VAT online services and includes notifications. If you do not already use an HMRC online service, you’ll first need to register for the Government Gateway.

The RCSL system is menu driven and gives help for each option. All aspects require completion electronically.

11.4 Submitting your RCSL

11.4.1 When to submit your final RCSL

To make sure you complete a final RCSL for the period up to 30 June 2022, if you are on:

• monthly VAT returns — a final RCSL will need to be submitted with your 06/22 VAT return
• quarterly VAT returns — a final RCSL will need to be submitted with either your 06/22, 07/22 or 08/22 VAT return

If you are on annual VAT returns or non-standard VAT returns that will be filed on or after 17 October 2022, you will need to submit a separate RCSL for the period up to 30 June 2022, between 1 July 2022 and before 17 October 2022.

If you do not submit your RCSL you’ll be charged a penalty calculated on a daily basis.

11.4.2 What information to submit

For each customer you’ve made reverse charge sales to, you must tell us the relevant period, the UK VAT registration number of the customer and the total net value of reverse charge sales to that customer for each calendar month in the period.

This means, for example, that if you’re to submit a quarterly RCSL for January, February and March you must tell us, for each customer, 3 values, one each for January, February and March. If you’ve made reverse charge sales to a customer for one or more months in the period but not every month you must record ‘0’ value for the months in which you made no reverse charge sales. For example:

Customer VAT number	January 2018	February 2018	March 2018
123456789	£10,000	£0	£30,000

You will only be able to make one such entry for each customer for each VAT period.

This means that your data must be aggregated for each month and you will not be able to submit invoice or transaction level data.

You must also give your contact name and telephone number.

11.4.3 How to submit your RCSL

You may either enter the information directly online or you can upload a comma separated values (CSV) file. Your accounts software application may be able to export the CSV file from your system. Contact your software vendor for further clarification.

11.4.4 The customer VAT number

You must submit the customer’s UK nine-digit VAT registration number, that is without ‘GB’ suffix, branch identifier or Economic Operator Registration and Identification (EORI) number. If, exceptionally, you do not have your customer’s VAT number at the time you submit your RCSL you should either enter a dummy VAT number, for example 111 1111 11 or 222 2222 22 and submit with value data, when you get the customer’s VAT number you should then amend the entry or submit the RCSL excluding that customer and later add the appropriate sales information once you’ve got the customer’s VAT number.

11.4.5 How to calculate the value

You must aggregate the values of all the reverse charge sales for the customer in the month, including any adjustments. You declare the whole pound amount only, and you may either round to the nearest pound or truncate the pence. If, after adjustments, the value is ‘0’ you must still submit the information. Likewise, if the total net value is negative you must submit the information with a leading negative sign, for example, – 100.

11.4.6 If you make a mistake

If you’ve submitted your RCSL and then find you’ve made a mistake you’ll need to give us the correct information by amending your original submission. If you’ve submitted your RCSL by completing the online list you’ll be able to add, delete or change lines online. If you submitted your RCSL by uploading a CSV file you must resubmit your complete list with the necessary additions, deletions or changes, that is, including all the lines that were correct in the original submission.

Mistake	Action
Customer omitted	Add customer VAT number and the value of sales for each month in the period
Incorrect VAT number for customer	Change VAT number to correct VAT number
Incorrect values	Change values to correct values
No RC sales made to customer in the period	Delete customer VAT number and values
Nil declaration made when RC sales made in period	Submit RCSL online or by uploading CSV file

11.4.7 If HMRC discovers an inaccuracy

Where HMRC discovers a material inaccuracy contained within a submitted RCSL you may be liable to a penalty of £100.

11.4.8 If you do not make any reverse charge sales in the period

If you do not make any reverse charge sales in a particular VAT period you must submit a nil declaration. You do this by selecting the ‘nil declaration’ option on the RCSL home page. You cannot submit a nil CSV file.

11.4.9 If you do not submit an RCSL

If you do not submit your RCSL you’ll be charged a penalty calculated on a daily basis, read paragraph 11.5.

11.4.10 Submitting an RCSL if you make a supply of specified services

You must not submit an RCSL for supplies of specified services. The RCSL is only for supplies made of specified goods.

11.4.11 If you get a supply of specified goods

If you get supplies of specified goods you must not complete and submit an RCSL. Only those who make supplies of specified goods must complete and submit an RCSL.

11.5 If you do not submit your RCSL

If you do not submit your RCSL you’ll be charged a penalty calculated on a daily basis, for a maximum of 100 days, which increases as each further default occurs, at the following rates:

• first penalty £5.00
• second penalty £10.00
• third and following penalties £15.00

The £15.00 penalty continues to be applied until you’ve had 4 clear quarters.

You can submit details of your RCSL returns using the Making Tax Digital for VAT service, if you’ve signed up for it.

You had until Friday 28 August 2020 to bring your RCSLs up to date. After this date if you did not submit your RCSL, sent it in late or made mistakes, you may be liable to a penalty

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