Reverse charge VAT

What is reverse charge VAT?

The reverse charge mechanism affects merchants in the UK, trading with other EC businesses. This mechanism removes the responsibility for reporting VAT on goods and services from the seller to the buyer. The recipient of the goods or services becomes responsible for reporting both the purchase and sale tax in their VAT return, with the two declarations offsetting each other. This means no VAT actually changes hands between supplier and customer but it is reported to the authorities.

For further information on how the reverse charge mechanism affects UK businesses, please visit

Reverse charge tax codes

Brightpearl uses special tax codes to account for reverse charge expenses in your VAT return. For UK merchants, these codes exist by default in your account and can be viewed at Settings > Tax > Tax codes.

Tax code Rate Reporting rate Purpose
RC2 0% 20% Reporting reverse charge expenses at the standard rate
RC5 0% 5% Reporting reverse charge expenses at the reduced rate
RC0 0% 0% Reporting reverse charge expenses at zero rate

These tax codes each have a rate of 0% which applies to the items on an invoice, bill or credit, but a separate reporting rate which is used by the VAT return.

When entering a supplier bill/credit or purchase invoice/credit using one of these codes, no tax is added to the transaction. However, the VAT return will account for the reporting rate in boxes 1 and 4. The net amount will be reported in both box 6 and 7.


When entering a supplier bill for £100 using tax code RC2 (reverse charge expenses at 20%), the tax rate applied to the bill is 0%. As such the tax amount is automatically calculated as £0. 


The resulting journal will contain a debit row posting to your chosen expense/overheads account with the tax code RC2, and a credit row posting to the creditors control account with tax code T9 (meaning this row is outside the scope of VAT).


On the VAT return, the reverse charge amount (in this example 20% of £100 = £20) is reported in boxes 1 and 4. The net amount is reported in both boxes 6 and 7. 


The VAT return is reporting both the purchase and sale tax associated with the transaction. The two cancel out such that the net VAT to be paid or reclaimed is £0.




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