VAT Reverse Charge on Imported Services: What UK Businesses Must Know

What Is the VAT Reverse Charge?

When you purchase services from a supplier based outside the UK, that supplier typically cannot charge you UK VAT. However, HMRC still wants to collect that VAT. The solution is the reverse charge mechanism: instead of the overseas supplier accounting for the VAT, you — the UK business receiving the service — must account for it yourself on your VAT return.

This applies to both limited companies and sole traders who are VAT-registered. If you're not VAT-registered, the reverse charge doesn't apply to you, but it's worth knowing about if you're approaching the £90,000 registration threshold.

Which Services Are Affected?

The reverse charge applies to a wide range of services purchased from suppliers outside the UK, commonly referred to as 'general rule' services under the place of supply rules. These include:

• Consultancy and advisory services
• Accounting and legal services
• Software licences and SaaS subscriptions (such as cloud tools, design software, or CRM platforms)
• Advertising and marketing services
• Data processing and web hosting
• Transfers of intellectual property and copyrights
• Telecommunications services

Essentially, if you're buying a B2B service that would be taxable if supplied in the UK, and the supplier is based outside the UK (whether in the EU or anywhere else), the reverse charge is likely to apply.

How to Account for the Reverse Charge on Your VAT Return

The process is straightforward but must be done correctly. When you receive an invoice from an overseas supplier with no UK VAT charged, you must:

• Calculate the VAT at the standard UK rate (currently 20%) on the net value of the service.
• Enter the VAT amount in Box 1 of your VAT return (VAT due on sales and other outputs).
• Enter the net value in Box 6 (total value of sales, excluding VAT).
• Enter the same VAT amount in Box 4 (VAT reclaimed on purchases) — assuming the service relates to your taxable business activities.
• Enter the net value in Box 7 (total value of purchases, excluding VAT).

In most cases, if your business is fully taxable (not partially exempt), the VAT in Box 1 and Box 4 cancel each other out, resulting in no net VAT cost. However, the entries must still be made — failing to do so is a reporting error that could attract HMRC penalties.

A Practical Example

You're a limited company director and you pay $500 (approximately £400) per month for a US-based project management SaaS tool. The US supplier charges no UK VAT. Under the reverse charge, you must account for £80 of VAT (£400 x 20%) on your VAT return. You declare £80 in Box 1 and reclaim £80 in Box 4. Net VAT cost: nil — but the entries are still legally required.

Common Mistakes to Avoid

• Ignoring the reverse charge entirely because the supplier didn't charge VAT — this is the most frequent error.
• Forgetting to include overseas purchases in Box 7, which skews your input figures.
• Applying the reverse charge to goods — this mechanism applies to services, not physical imports (which are handled differently at the border).
• Missing partially exempt implications — if your business is partially exempt, you may not be able to reclaim all of the reverse charge VAT, creating an actual cost.

Keep Clear Records

HMRC expects you to retain invoices from overseas suppliers and evidence that the reverse charge was correctly applied. Make a note on each invoice confirming you've accounted for it under the reverse charge. Most modern accounting software, including cloud platforms, can automate these entries once set up correctly — check your VAT settings for an 'overseas services' or 'reverse charge' transaction type.

If you're unsure whether a specific service qualifies, HMRC's VAT Notice 741A covers the place of supply rules in detail, or speak to a qualified accountant before your next VAT return deadline.