Almost every UK business now buys services from abroad, Google and Meta advertising, cloud hosting, software subscriptions, an overseas developer or consultant. The invoices arrive with no VAT charged, which looks like good news and is very often treated as nothing to do. That treatment is wrong, and in one specific scenario it is expensive.
What the reverse charge actually does
Under the general business-to-business place-of-supply rule, services are treated as supplied where the customer belongs, not the supplier. So when a US or EU supplier sells services to a UK business, the supply lands in the UK, and rather than asking an overseas company to register for UK VAT, the system shifts the obligation onto you. This is the reverse charge: you account for the VAT the supplier would have charged, on your own return.
Mechanically, you put the VAT on both sides of the same return. You declare output VAT at the UK rate that would have applied (usually 20%) in Box 1, and, if you are fully taxable, you reclaim exactly the same figure as input VAT in Box 4. The net cash effect is nil. The net value of the purchase also goes in Box 7, and, under the current return rules, in Box 6 as well.
The trap: it counts towards the registration threshold
Here is the part that catches people out. Reverse-charge services you receive from overseas count as if they were your own taxable supplies when you test your turnover against the £90,000 VAT registration threshold.
Picture a consultancy turning over £78,000 a year, comfortably under the threshold and not registered. It spends £15,000 a year on overseas software and advertising. Add those reverse-charge services to its own turnover and it is at £93,000, over the line, and legally required to register, even though its actual sales never came close. Businesses discover this late, usually during a compliance check, and by then the liability has been accruing.
The rule goes further than most people expect. It applies even where your own supplies are entirely exempt. HMRC's own guidance uses the example of a wholly exempt insurance broker: because it is a business receiving general-rule services from abroad, those services count towards the registration threshold, and the broker may be required to register purely in order to account for the reverse charge, despite making no taxable supplies at all. An exempt business that has never given VAT registration a second thought can be dragged into it by its software subscriptions.
If you are close to the threshold and buying meaningfully from overseas suppliers, this test needs running properly. Our guide to whether you have to register for VAT covers the thresholds themselves; this is the input that most people forget to include.
When the reverse charge is a real cost, not just paperwork
For a fully taxable business the reverse charge nets to zero, it is an administrative entry. It stops being cost-neutral the moment you cannot recover input VAT in full:
- Exempt businesses, insurance brokers, many financial services firms, some education and healthcare providers, declare the output VAT but cannot reclaim it. The reverse charge is a straight 20% cost on everything they buy from abroad.
- Partly exempt businesses recover only a proportion. See our guide to partial exemption for how that apportionment works.
- Flat Rate Scheme users must account for reverse-charge purchases outside the flat rate calculation, they cannot be swept up in the flat percentage.
For an exempt financial services business spending six figures a year on overseas systems, this is not a rounding error. It is a genuine and often unbudgeted expense.
What is caught, and what is not
The general rule catches most B2B services bought from a supplier outside the UK: advertising, consultancy, legal and accountancy fees, software and SaaS, data and hosting, licences, and intra-group management charges. Some categories follow different place-of-supply rules, land-related services are taxed where the land is, admission to events where the event happens. Goods are a separate regime entirely: importing physical goods brings in import VAT, customs duty and potentially postponed VAT accounting, not the services reverse charge.
Getting it right in your accounting software
Xero, QuickBooks and Sage all ship with dedicated reverse-charge tax rates that post both sides of the entry automatically. The failure is almost never the software, it is coding the bill as "No VAT" or "Zero rated" because the supplier's invoice showed no VAT. Those codes look harmless and silently understate both your output tax and your threshold test. A quick review of how overseas supplier bills are coded is one of the highest-value hours you can spend on a VAT process.
Where this usually goes wrong
- Coding overseas invoices as zero-rated or outside the scope because there is no VAT shown.
- Ignoring the threshold test and registering late, with penalties and back-dated VAT.
- Assuming it nets off when the business is exempt or partly exempt.
- Missing intra-group charges from an overseas parent or sister company, these are services like any other.
We review overseas supplier coding and the threshold position as a standard part of our VAT service, and it is one of the more common places we find historic errors worth correcting before HMRC does. If you buy from abroad and are not certain your returns reflect it properly, book a VAT review with our team.