Reverse charge on EU VAT
What is the VAT reverse charge?
Within a VAT system, the VAT-registered supplier typically charges VAT on its goods or services. The supplier collects VAT from the customer then remits it to the relevant tax authorities. The reverse charge ‘reverses’ this responsibility from the supplier to the customer. With the reverse charge applied, the supplier issues an invoice without VAT, but with a mandatory reference to the reverse charge within it. The buyer then calculates and pays any VAT due to the relevant tax authorities. The buyer may be able to deduct the VAT as input tax if it has a right of deduction.
The VAT reverse charge reduces or removes the obligation for sellers to register for VAT in the country where the supply is made. If the supplier incurs any local VAT on costs related to the service or goods supplied under the reverse charge, they can be recovered through an EU VAT reclaim.
The reverse charge was created when the EU VAT system was reformed for the launch of the single market in 1993. This helped to simplify VAT reporting responsibilities for VAT-registered businesses in the EU.
Examples of where the reverse charge is used
The reverse charge applies if the supplier is not established in the country where the VAT is due. It’s mandatory within the EU for certain intra-community supplies of goods or services.
It also applies to the supply of services to an EU VAT-registered business in another EU member state, and has been compulsory since 2010. The supply of certain services, including those related to immovable property and live events, still operates under the VAT place of supply rules, and the place of supply is where the service takes place.
Domestic reverse charges apply to services supplied by ‘specified services’ between VAT-registered businesses. Specified products or services generally describe building and construction services under Construction Industry Schemes (CIS).
How does the reverse charge work?
When the reverse charge is applied, the customer — the recipient of the goods or services — receives an invoice without VAT. When the customer prepares its VAT return, it calculates the VAT amount and reports it as due and deductible. The two entries cancel each other out from a cash payment perspective in the same return. Tax authorities can see the transaction reported in the special boxes provided in the returns for cross-border supplies of goods or services.
Non-VAT-registered recipients under the reverse charge
One area that may cause a VAT registration obligation is where EU businesses are not VAT registered (because they do not have taxable supplies) and they receive services from outside Europe. The services under the reverse charge will count towards their own VAT registration threshold. This means companies such as holding companies can be forced to register for VAT, and are incurring input VAT, which cannot be recovered as they have no taxable supplies for output VAT.
Domestic VAT reverse charge on specific goods and services
The reverse charge also applies to domestic supplies, but it is not necessary for the supplier to be non-established in the relevant nation. The EU VAT Directive allowed the reverse charge on:
- Natural gas, electricity, heat and cooling
- Supplies involving the use and sale of immovable property
- The sale of investment gold
- Goods or services vulnerable to fraud, such as allowance for emissions of greenhouse gasses, integrated smartphones, cereal or raw metals
EU VAT triangulations
VAT triangulation occurs in the EU when goods are moved between three parties located in different EU countries as part of a B2B transaction.
Let’s look at an example: Business A is a supplier, business B is the seller, and business C is the customer. All three are located in three different EU member states and are trading cross-border.
Normally, where cross-border transactions occur within the EU, VAT would be charged at each step of the supply chain — A the supplier would charge VAT to B the seller, who in turn would charge VAT when selling to C the customer. VAT triangulation means that instead of VAT being charged at each step of the process, the VAT liability is transferred directly to the final customer’s country. This means that A the supplier does not charge VAT to B the seller, who also does not charge VAT to C the customer.
The responsibility for charging and reporting the VAT shifts entirely to C the customer who charges VAT to its end customer — and reports the input and output VAT in its own domestic VAT returns.
Triangulation simplification was created within EU VAT law to reduce the administrative and compliance burdens on businesses and tax authorities alike with the EU VAT system, i.e., by reducing the number of times an EU business has to apply for a VAT registration.
This simplification is implemented across all member states, and reduces the amount of VAT registrations businesses need to get in order to sell and operate compliantly.
VAT reverse charge FAQs
It applies in some cases when the supplier is based in an area of VAT payable or in which the transaction has the potential for fraud and evasion. The reverse charge mechanism has the following effect: The suppliers don’t charge VAT on the invoice but indicate the reverse charges apply.
To calculate the reversed VAT charge, divide the percentage of the VAT rate by 100 (i.e., 20% VAT is 0.25).
When issuing an invoice for a transaction where the reverse charge applies, you should not charge VAT but refer to VAT as 0% (in the same way for other types of VAT-exempt sales). A reference to the reverse charge must be included, with a brief written explanation as to why (in some countries, simply writing ‘reverse charge’ will suffice). In most instances where the reverse charge applies, the VAT number of the buyer must be included in the invoice. The net amount must be stated in the invoice, which is what you will be paid.
The VAT reverse charge cannot be used for a number of services (when they are supplied on their own) — mostly building and construction services. These services include drilling for, or extracting, oil or natural gas, extracting minerals and tunneling, boring, or construction of underground works, for this purpose, manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site. Also included are the manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems. The reverse charge also cannot be used for the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants.
On a smaller scale, the reverse charge cannot be used when making, installing and repairing art works such as sculptures, murals and other items that are purely artistic, signwriting and erecting, installing and repairing signboards and advertisements, and the installation of blinds and shutters, and security systems.
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- Supply and install of goods for European VAT
- Reverse charge on EU VAT
- Electronic VAT invoice requirements
- VAT Recovery
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- EC sales list (ESL)
- Intrastat reporting thresholds
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- Importing goods and EU VAT
- Call off & consignment stock VAT
- VAT information exchange system (VIES)