Reverse Charge VAT Explained: What Creative Businesses Need to Know

If you’ve ever had an invoice land in your inbox with the words “Reverse Charge VAT applies” splashed across the bottom, you’re not alone in wondering what on earth it means. Reverse charge VAT is one of those HMRC quirks that sounds complicated but boils down to a simple idea: the buyer, not the seller, accounts for the VAT.

Let’s break it down and look at what it could mean for your creative business.

What is Reverse Charge VAT?

Normally, when you buy a service or goods from another UK VAT-registered business, they add VAT to their invoice, collect it from you, and pass it on to HMRC.

With a reverse charge, this flips around:

• The supplier does not charge VAT on their invoice.

• You (the customer) record the VAT as both input VAT (as if you’d been charged) and output VAT (as if you’d charged it).

This means no actual cash changes hands for the VAT itself, but the transaction still appears on your VAT return.

When Does Reverse Charge Apply?

There are a few situations where HMRC insists on using the reverse charge. The ones most likely to affect creative businesses are:

1. Buying Services from Overseas
   • Example: You hire a video editor in France to work on a project. Their invoice has no UK VAT. You apply the reverse charge on your VAT return at the UK rate.
   • Effect: No extra VAT to pay if you’re fully VAT-registered, but you must show it correctly on your return.
     
     
2. Certain Domestic Services (Construction)
   • The “domestic reverse charge” applies to specific industries such as construction. In this case, construction would not typically extend to temporary structures such as TV, film and theatre sets. 
     
     
3. Digital Services from Abroad
   • Buying software subscriptions (Adobe Acrobat Pro, hosting, cloud rendering services, online advertising) from a non-UK supplier often falls under the reverse charge.

If your business is not VAT-registered, you can’t use the reverse charge mechanism. Instead, you may have to register for VAT in order to deal with the supply, or pay the supplier’s local VAT instead.

Why HMRC Uses It

Reverse charging is HMRC’s way of plugging tax leaks and simplifying cross-border trade. By shifting the VAT reporting to the UK customer, HMRC ensures the correct rate of UK VAT is applied, without chasing a supplier in another country.

How It Affects Your Creative Business

• Cash Flow: Normally neutral for fully VAT-registered businesses. You charge and reclaim the VAT at the same time, so there’s no net cost.

• Admin: You must show the transaction in the correct boxes on your VAT return (Box 1 and Box 4 for the VAT, Box 6 and 7 for the net value).

• Non-Registered Businesses: If you’re below the VAT threshold but buy services from overseas, you may trigger a need to register for VAT purely to account for the reverse charge.

Which Businesses Could Be Affected?

For most creative businesses, reverse charge VAT doesn’t have a big impact. However, if your business makes exempt or partially exempt supplies (like providing certain education services or financial advice), you could find yourself in a tricky situation. This is because you may not be able to reclaim all the VAT you’ve accounted for under the reverse charge mechanism.

If you only make exempt supplies or don’t charge VAT on some of your services, applying reverse charge VAT can result in you paying VAT but not being able to recover it. In this case, the VAT process can become a bit more complicated, and you might need some professional guidance to navigate it effectively.

Practical Tips

• Check Your Invoices: Overseas suppliers should not charge UK VAT. If they do, ask them to correct it.

• Know Your Thresholds: Regularly buying in services from abroad can push you into VAT registration even if your UK sales are under £90,000.

• Use Good Software: Xero, QuickBooks and other platforms can handle reverse charge transactions automatically once you choose the right tax code.
  
  

Bottom Line

Reverse charge VAT isn’t something to fear, but it does require you to be alert. If you’re buying in overseas talent, software, or production services, you’re probably dealing with it already. Set up your systems correctly and you’ll stay compliant without any surprises.

Need help untangling your VAT position? Get in touch and we’ll make sure your creative business is charging, and reclaiming, VAT the right way.