Reverse Charge Mechanism
A VAT accounting mechanism where the recipient (buyer) of goods or services accounts for VAT instead of the supplier.
What is the Reverse Charge?
The Reverse Charge Mechanism is a special VAT procedure where the liability to account for VAT shifts from the supplier to the recipient. Instead of the supplier charging VAT on the invoice, the recipient self-accounts for the VAT directly on their VAT return. This mechanism prevents VAT leakage and simplifies cross-border transactions.
When Does Reverse Charge Apply?
- 1 Imported Services: Services received from a supplier outside the UAE (non-resident) by a UAE recipient
- 2 Goods Imported from Designated Zones: Goods purchased from designated free zones for use in the UAE
- 3 Specific Domestic Supplies: Gold, silver, and platinum sales between VAT-registered traders
- 4 Telecommunications & Digital Services: Certain telecommunication services under specific conditions
How Reverse Charge Works
Standard VAT
Supplier: Charges 5% VAT
Invoice: Shows VAT separately
Supplier: Reports Output Tax
Recipient: Claims Input Tax
Reverse Charge
Supplier: Does not charge VAT
Invoice: States "Reverse Charge"
Recipient: Self-accounts for VAT
Recipient: Claims Input Tax (if eligible)
Accounting for Reverse Charge
The recipient accounts for reverse charge VAT on their VAT return (Form 201):
- Report the value in Box 8 (Standard Rated Purchases)
- Calculate 5% VAT which appears in both Output Tax (Box 7) and Input Tax (Box 11)
- Net effect is typically zero if fully recoverable (Output Tax minus Input Tax cancels out)
Example: Imported Services
Scenario: A UAE company receives consultancy services worth AED 10,000 from a UK-based consultant (non-resident supplier).
Supplier (UK): Issues invoice for AED 10,000 (no UAE VAT charged)
Recipient (UAE): Self-accounts for reverse charge VAT
Output Tax: AED 500 (5% of AED 10,000)
Input Tax: AED 500 (recoverable if used for taxable business)
Net VAT Payable: AED 0 (AED 500 - AED 500)
Invoice Requirements
When reverse charge applies, the invoice must:
- Not show any UAE VAT amount
- Include the statement "VAT to be accounted for by recipient under reverse charge mechanism"
- Show the supplier's details (even if non-resident)
- Be retained for compliance and audit purposes
Common Reverse Charge Scenarios
Professional Services
Legal, accounting, consulting services from abroad
Digital Services
Software licenses, cloud services from foreign providers
Marketing Services
Advertising, market research from international agencies
Technical Services
Engineering, IT support from overseas contractors
Benefits of Reverse Charge
- • Prevents VAT non-compliance by foreign suppliers
- • Simplifies cross-border transactions
- • Ensures VAT is captured on imported services
- • Often results in zero net VAT for businesses (if fully recoverable)
- • Reduces administrative burden on non-resident suppliers
Related Terms
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