Ithy - Navigating VAT: Services from Portugal to the UK and the Reverse Charge Mechanism

Key Highlights of VAT on Services from Portugal to the UK

Reverse Charge Application: For B2B services supplied from Portugal to a UK VAT-registered business, the reverse charge mechanism generally applies, meaning the UK recipient accounts for the VAT.
Post-Brexit Implications: Since Brexit, the UK is considered a third country for VAT purposes, simplifying some aspects of services supplied from the EU (like Portugal) to the UK, as the EU's internal market rules no longer directly apply.
Customer's Responsibility: The UK business receiving the service is responsible for "self-accounting" for the VAT, declaring both output and input VAT on their UK VAT return, often resulting in a nil net impact if fully recoverable.

When a business in Portugal provides services to a client in the United Kingdom, the application of Value Added Tax (VAT) is primarily governed by the "place of supply" rules and, crucially, the reverse charge mechanism. This has become particularly pertinent following the UK's departure from the European Union, which redefined the VAT landscape for cross-border transactions between the two regions. Understanding these rules is essential for businesses on both sides to ensure compliance and avoid unexpected tax liabilities.

Understanding Cross-Border VAT for Services

The "Place of Supply" Rule for Services

The fundamental principle for VAT on services is the "place of supply" rule. For business-to-business (B2B) services, the general rule is that the place of supply is where the customer is established. In the scenario of a Portuguese business providing services to a UK business, since the UK business is the recipient, the place of supply is considered to be the UK. This means that the service is subject to UK VAT rules, not Portuguese VAT.

Historically, within the EU, this was managed under intra-community supply rules. However, post-Brexit, the UK is treated as a "third country" (non-EU member state). This shift means that while the underlying principle of the place of supply remains, the specific mechanics of accounting for VAT adapt to this new relationship.

Introduction to the Reverse Charge Mechanism

The reverse charge mechanism is a simplification measure designed to shift the responsibility for accounting for VAT from the supplier to the recipient of goods or services. Under normal VAT rules, the supplier charges VAT on their invoice and then remits this VAT to their local tax authority. The buyer pays the VAT to the supplier and, if VAT-registered, can typically reclaim it as input VAT.

With the reverse charge, this process is altered. The supplier (in Portugal) does not charge VAT on their invoice to the UK business. Instead, the UK business (the recipient) is required to "self-account" for the VAT. This involves declaring both the output VAT (as if they made the supply themselves) and the corresponding input VAT (as if they paid it) on their own VAT return. This often results in a "nil net" impact on the VAT return for the UK business, provided they can fully recover their input VAT.

Diagram illustrating the reverse charge VAT flow.

A simplified diagram illustrating the flow of a reverse charge VAT transaction.

Why the Reverse Charge?

The reverse charge mechanism serves several crucial functions, particularly in cross-border transactions:

Simplification: It prevents the foreign supplier (the Portuguese business) from having to register for VAT in the customer's country (the UK) solely to account for VAT on services. This significantly reduces administrative burdens.
Fraud Prevention: It acts as an anti-fraud measure, especially in sectors prone to carousel fraud, by making the recipient responsible for accounting for VAT.
Ensuring Compliance: It ensures that VAT is accounted for in the country where the consumption occurs, aligning with the principle of destination-based taxation.

How Reverse Charge Works for Services from Portugal to the UK

When a Portuguese business provides services to a UK VAT-registered business, here’s how the reverse charge typically operates:

No VAT Charged by Portuguese Supplier: The Portuguese business will issue an invoice for the services without charging Portuguese VAT. The invoice should clearly state that the reverse charge applies, often by referencing the relevant VAT directive or local legislation (e.g., "Reverse Charge: Customer to account for VAT").
UK Business Accounts for VAT: The UK VAT-registered business, upon receiving the service, becomes liable for the VAT. They will:
- Calculate the VAT due on the service as if they had supplied it themselves, using the applicable UK VAT rate (the standard rate in the UK is 20%).
- Record this as "output VAT" (VAT on sales) in Box 1 of their UK VAT return.
- Simultaneously, record the same amount as "input VAT" (VAT on purchases) in Box 4 of their UK VAT return (assuming the service is used for taxable supplies and the VAT is fully recoverable).
- Include the net value of the service in Box 6 (total value of sales) and Box 7 (total value of purchases) of their VAT return.

This process means that for a fully taxable UK business, the output VAT and input VAT effectively cancel each other out, resulting in no net VAT payment to HMRC for that specific transaction. However, the transaction must still be correctly reported on the VAT return.

Specific Considerations for Services

While the general rule applies to most B2B services, there are specific exceptions or nuances to consider:

Services to Non-VAT Registered UK Businesses/Consumers (B2C): If the Portuguese business provides services directly to a non-VAT registered UK business or a private consumer (B2C), the rules change. For digital services, the Portuguese business would typically have to register for VAT in the UK or use a One Stop Shop (OSS) equivalent if the UK had implemented one for third countries. For other services, the place of supply rules can become more complex, sometimes depending on where the service is physically performed or "used and enjoyed." However, for most general rule B2C services, the place of supply would be where the supplier belongs, meaning Portuguese VAT would be charged.
Specific Services: Certain types of services have specific place of supply rules that override the general B2B rule. These can include services related to land, cultural or artistic events, passenger transport, and short-term hire of means of transport. In such cases, the VAT treatment depends on where the land is located, where the event takes place, or where the transport occurs, etc.
UK VAT Registration of Portuguese Supplier: If the Portuguese supplier has a fixed establishment and a UK VAT registration number in the UK for other activities (e.g., supplying goods within the UK), then UK VAT might be charged directly by them on the invoice for services supplied from that UK establishment, rather than the reverse charge applying. However, if the supply of services is from their Portuguese base, the reverse charge generally still applies even if they have a UK VAT number.

Post-Brexit VAT Landscape for UK-Portugal Services

Brexit significantly altered the VAT treatment of goods moving between the UK and EU. For services, the impact is generally less disruptive than for goods, largely because the reverse charge mechanism for B2B services to third countries was already in place. The key change is that the UK is no longer considered an EU member state, meaning intra-community rules no longer apply.

This means that the concepts of "intra-community acquisition" or "intra-community supply" for services are no longer relevant between the UK and Portugal. Instead, transactions are treated as supplies to or from a third country. This simplifies some aspects by removing the need for specific EU VAT numbers (like VIES checks for intra-community supplies), but reinforces the reliance on the reverse charge for B2B services.

Key Changes and Continuities

Aspect	Pre-Brexit (Portugal to UK VAT-registered Business)	Post-Brexit (Portugal to UK VAT-registered Business)
Place of Supply Rule	Remained in the UK (customer's location).	Remains in the UK (customer's location).
VAT Charged by Supplier	Portuguese supplier did not charge VAT, marked as intra-community supply.	Portuguese supplier does not charge VAT, marked as supply to a third country.
VAT Accounting by Customer (UK)	Accounted for via reverse charge (intra-community acquisition).	Accounted for via reverse charge (import of services from a third country).
Invoicing Requirements	Invoice stated "reverse charge" and referenced EU directive. Supplier verified UK VAT number via VIES.	Invoice states "reverse charge." Verification of UK VAT number is still good practice, but not via VIES.
Supplier's Reporting (Portugal)	Reported in recap statements (ESL) for intra-community supplies.	No longer reported in ESL for supplies to the UK. Reported as an export of services.

As illustrated, while the administrative classification has changed, the core mechanism for B2B services from Portugal to the UK largely continues to rely on the reverse charge. This highlights its importance in international trade, irrespective of EU membership.

Portugal's VAT Landscape and Recent Updates for 2025

Portugal, as an EU member state, adheres to EU VAT directives, but also has its own national legislation and rates. For businesses operating in Portugal or supplying services from there, it's crucial to be aware of the domestic VAT environment.

Portugal has three main VAT rates: a standard rate (23% on the mainland, 22% in Madeira, and 16% in the Azores), a reduced rate, and a super-reduced rate for specific goods and services. Recent legislative updates in Portugal, such as Decree-Laws n.º 33/2025, 34/2025, and 35/2025, published on March 24, 2025, have introduced significant changes. These aim to align with European directives and modernize special regimes, including those for small businesses and cultural services. Additionally, simplification measures effective from July 1, 2025, are designed to reduce administrative burdens, such as removing the customer summary map requirement and allowing more flexibility for monthly VAT filings.

From January 2025, a new optional EU VAT registration threshold of EUR 100,000 has been implemented by the European Commission, allowing EU-resident companies to declare sales to other EU states as exempt under a new VAT registration type, which is relevant for businesses supplying within the EU, but not directly for services from Portugal to the UK (a third country).

Practical Steps for Businesses

For the Portuguese Service Provider

Verify Customer's VAT Status: Before issuing an invoice, confirm that the UK customer is VAT-registered. While VIES no longer applies for UK verification, obtain their UK VAT number.
Issue Correct Invoice: Ensure the invoice does not include Portuguese VAT and explicitly states that the reverse charge applies (e.g., "Reverse Charge: Customer to account for VAT in the UK" or "VAT reverse charged under Article 44 EU VAT Directive / UK place of supply rules").
Internal Records: Maintain clear internal records of these cross-border services as exports of services.

For the UK Business Customer

Account for VAT: Accurately self-assess and account for the reverse charge on your UK VAT return (Boxes 1, 4, 6, and 7).
Understand Recoverability: Be aware of your VAT recovery position. If you make exempt supplies, you may not be able to fully recover the input VAT component of the reverse charge, leading to a real cost.
Maintain Records: Keep the invoice from the Portuguese supplier and your internal calculations as part of your VAT records.

Chart Analysis: Cross-Border VAT Complexity Factors

The complexity of cross-border VAT, especially concerning the reverse charge, can vary based on several factors. This radar chart visualizes the perceived complexity levels for different scenarios:

The chart illustrates that while B2B services from Portugal to the UK using the reverse charge are relatively well-defined, areas like B2C digital services, goods imports post-Brexit, and services subject to specific "use and enjoyment" rules can introduce higher levels of complexity due to varying registration and reporting requirements. Domestic reverse charges (e.g., in construction) also have their own specific rules but might be seen as slightly less complex than international B2C digital sales due to operating within a single jurisdiction's framework.

Understanding Cross-Border VAT and Reverse Charge Further

To deepen your understanding of cross-border VAT and the reverse charge mechanism, particularly in the context of UK-EU transactions, this video offers valuable insights:

The video "Navigating New UK-EU Cross-Border Selling Rules" by Zonos provides an excellent overview of how the rollout of the Import One Stop Shop (IOSS) and evolving UK VAT laws have reshaped cross-border selling between the UK and the EU. While the video might lean more towards goods, the principles of adapting to new VAT regimes and the importance of compliance, including understanding where the VAT liability lies, are highly relevant to services too. It underscores the need for businesses to stay updated on regulatory changes to ensure smooth cross-border operations and avoid unexpected tax costs, which is directly applicable to handling reverse charges on services.

Frequently Asked Questions (FAQ)

What is the main purpose of the reverse charge mechanism?

The main purpose of the reverse charge mechanism is to shift the responsibility for accounting for VAT from the supplier to the recipient of goods or services, particularly in cross-border transactions. This simplifies administration by avoiding the need for foreign suppliers to register for VAT in the customer's country and helps combat VAT fraud.

Does the Portuguese business need to register for UK VAT if they provide services to a UK business?

Generally, no. If the Portuguese business is providing services to a UK VAT-registered business, the reverse charge mechanism applies, meaning the UK customer accounts for the VAT. This eliminates the need for the Portuguese supplier to register for VAT in the UK for these B2B service supplies.

What if the UK client is not VAT registered?

If the UK client is not VAT registered (i.e., it's a business-to-consumer, B2C, transaction), the general B2B reverse charge rule does not apply. For digital services supplied from Portugal to a non-VAT registered UK consumer, the Portuguese business would typically need to charge Portuguese VAT. For other services, the place of supply rules might vary, but it's less likely for the reverse charge to apply, and Portuguese VAT would often be due.

How does Brexit affect the reverse charge for services from Portugal to the UK?

Post-Brexit, the UK is considered a third country for VAT purposes. This means that services from Portugal to the UK are treated as exports of services from the EU to a non-EU country. While the classification has changed from "intra-community supply" to "export of services," the practical application of the reverse charge for B2B services remains largely the same: the Portuguese supplier does not charge VAT, and the UK recipient self-accounts for it.

Are there any services that are exempt from the reverse charge?

Yes, specific services have different place of supply rules that override the general B2B rule and thus might not be subject to the reverse charge in the same way. Examples include services related to land, cultural events, or short-term hire of transport. Additionally, if a supply would be exempt from VAT if provided domestically, the reverse charge might not apply even if other conditions are met.

Conclusion

The VAT treatment of services supplied from Portugal to the UK, particularly concerning the reverse charge, is a critical aspect for businesses engaged in cross-border trade. While Brexit has reclassified the UK as a third country, the underlying mechanism of the reverse charge for B2B services remains a cornerstone of VAT compliance. The Portuguese supplier typically issues an invoice without VAT, and the UK VAT-registered recipient is responsible for self-accounting for the VAT on their domestic return. This system streamlines transactions and minimizes the administrative burden for suppliers, but necessitates diligence from recipients to ensure correct reporting and compliance with UK VAT regulations. Staying informed about both Portuguese and UK VAT updates is paramount for seamless cross-border operations.