VAT and the Reverse Charge When You Hire an Overseas Contractor
Start here: yes, VAT applies, and no, it usually does not cost you anything
When a UK business buys services from a supplier outside the UK, the VAT does not disappear. It moves. Instead of the overseas supplier charging you VAT, you account for it yourself under what is called the reverse charge.
For most VAT-registered businesses this is a bookkeeping entry with no cash effect: you declare the VAT as if you had charged it to yourself, and reclaim the same amount in the same return. Net cost, nil. It still has to be done correctly, and the trap in the next section catches businesses that assume none of this applies to them.
How the reverse charge actually works
Your contractor in the Philippines invoices you with no VAT on it — correctly, because they are not in the UK VAT system and have no business charging UK VAT.
On your VAT return you then treat that purchase as though you had supplied the service to yourself at the UK rate. In practical terms the amount appears twice: once as output VAT and once as input VAT, cancelling out for a fully taxable business. The net value of the purchase also goes into your totals boxes.
Any decent bookkeeping package handles this with a tick box — in Xero it is the reverse charge VAT rate, and QuickBooks has its equivalent. The mistake to avoid is coding the invoice as zero-rated or out of scope, which quietly leaves the reverse charge undeclared.
The trap: this can force you to register for VAT
Here is the part that catches people, and it is worth reading twice if you are not VAT registered.
Purchases of services from overseas suppliers count towards the VAT registration threshold. If your overseas service purchases exceed the threshold in a rolling twelve-month period, you may be required to register for VAT purely to account for the reverse charge — even if your own turnover is nowhere near it.
For a small UK business hiring one professional this is very unlikely to bite. For a business building a team of several, or combining offshore staff with overseas software and consultancy spend, it is a real threshold to keep an eye on. Nobody enjoys discovering it retrospectively.
If you are not VAT registered, keep a simple running total of everything you buy from outside the UK and check it against the current threshold each quarter. That is the whole control.
If your business is VAT exempt or partly exempt
Insurance brokers, many financial services, some healthcare and education providers — if your supplies are exempt, you cannot reclaim the input side of the reverse charge. The VAT you declare becomes a genuine cost rather than a cancelling entry.
It does not make hiring overseas a bad idea, but it does change the arithmetic, and it is a case where the advice is worth taking before you commit rather than after. If this is you, price it in.
What about our fee?
PH Talents is a UK company, so our placement fee is a UK supply with UK VAT treated the ordinary way. There is no reverse charge on it — it is a normal UK invoice.
The reverse charge question only concerns what you pay your contractor directly, because that is the payment crossing a border. This is one of the practical consequences of our model: you have one straightforward UK invoice from us, and a separate overseas supplier relationship with your own professional.
Keeping the paperwork right
Have invoices addressed to the business rather than to an individual. Keep them — a monthly invoice from your contractor is what evidences both the expense and the reverse charge treatment. Record the transaction properly even though the invoice will not mention the reverse charge, because your supplier has no reason to know about UK VAT rules.
Agreeing a fixed monthly invoice date with your contractor makes this considerably easier at quarter end, and it is good practice for their sake anyway.
The short version
Your contractor invoices with no VAT. You account for the reverse charge on your return, which normally nets to zero. If you are not VAT registered, watch the running total of overseas purchases against the threshold. If you are exempt or partly exempt, get advice first because it is a real cost for you. And keep the invoices.
We are a talent agency, not your accountants. Everything here is the general shape of the rules, and confirming it against your own position is a short conversation with whoever does your books.
Frequently asked questions
Do I pay VAT on a contractor based in the Philippines?
Your contractor invoices you without VAT, because they are outside the UK VAT system. You then account for the VAT yourself under the reverse charge on your own VAT return. For a fully taxable business this nets to zero - you declare it and reclaim it in the same return.
Can hiring an overseas contractor force me to register for VAT?
Yes, and this surprises people. Purchases of services from overseas suppliers count towards the VAT registration threshold. If your overseas service purchases exceed the threshold over a rolling twelve months, you may have to register purely to account for the reverse charge, even if your own turnover is well below it. Keep a running total if you are not registered.
How do I record the reverse charge in Xero or QuickBooks?
Both have a specific reverse charge VAT rate - apply it to the contractor's invoice and the software makes the entries on both sides of your return. The common mistake is coding the invoice as zero-rated or out of scope, which leaves the reverse charge undeclared.
What if my business is VAT exempt?
Then you cannot reclaim the input side, so the reverse charge VAT becomes a genuine cost rather than a cancelling entry. This affects insurance, many financial services, and some healthcare and education businesses. It does not rule out hiring overseas, but price it in and take advice first.
Is there VAT on the PH Talents placement fee?
Our fee is a UK supply from a UK company, so it is treated in the ordinary way with no reverse charge. The reverse charge only concerns what you pay your contractor directly, because that is the payment crossing a border.
What records do I need to keep?
The monthly invoices from your contractor, addressed to your business rather than to an individual. They evidence both the expense and the reverse charge treatment. Your contractor's invoice will not mention the reverse charge - they have no reason to know UK VAT rules - so recording it correctly is on your side.