What is Reverse Charge, and how does it work?
The reverse charge mechanism is a reason why an invoice may not include VAT on a sale or purchase between two businesses, providing they both have VAT numbers. As a rule, this mechanism allows for the supplier to not charge VAT and the consumer to therefore not pay VAT, however there are still obligations to report these transactions on the VAT return as a ‘plus and minus transaction’ therefore leaving no VAT to be paid. There are some cases where ‘partial exemption’ rules apply, and therefore there is not a full deduction.
If the transaction is applicable for reverse charge, this is handled in different ways by both the supplier and the consumer.
The supplier will issue an invoice without VAT, however must include the consumers VAT number, and a note indicating the 0% VAT is due to reverse charge. This is often required to be in the language of the consumer’s destination, or uses specific wording for each country – frequently used country specific terms can be found below.
For the consumer, they will receive the invoice without VAT, and pay the NET value stated on the invoice, however they do have a reporting responsibility whereby on the VAT return they must manually calculate the VAT amount that would be due, and show this as BOTH payable and deductible on the VAT return. This will result in no VAT to pay, but will show the transaction on the VAT return.
Types of Reverse Charge:
There are a number of different scenarios when reverse charge may apply to a transaction, however it depends on factors such as whether the transaction is domestic or intra-community, whether the transaction related to sale of goods or a service, and which country you are VAT registered in.
Intra-community Reverse Charge
For the sale and purchase of goods, the business making an intra-community acquisition is usually liable to pay the VAT, however by recording the Intra-community supply in the same return, this nets out to a O% VAT liability. In order to apply this to a transaction, the two business’ must be VAT registered in different EU Countries, and the goods must travel cross-border. More on Intra-community reverse charge
For services where the consumer and supplier are not established in the same country, the customer who is VAT registered is liable to pay the VAT, under the general B2B rule. In both instances for goods and services, the invoice must include both the supplier and consumers VAT numbers, and the reveres-charge exemption statement, some of which can be found below.
Domestic Reverse Charge
Domestic reverse charge is optional for each EU country, and each jurisdiction is free to impose additional conditions. The domestic reverse charge for both goods and services can be imposed where the supplier is not established and the transaction is located in the country of the supplier. See below for some countries who offer specific reverse charge scheme for these types of transactions.
Domestic Reverse Charge on Specific Goods and Services
This mechanism allows the reverse charge to be applied on the sale of natural gas and electricity, certain supplies of immoveable property, investment gold and good or services sensitive to fraud (ie. Emitting greenhouse gas, mobile phones, cereals and raw materials). While the rules cover these different categories’, each country has its own set of requirements in order to use.
Reverse Charge with Triangulation
This is an EU-wide ruling, which is not optional in different countries. In a triangular transaction, the reverse charge can be used where by the end customer will be liable for the VAT. The invoice flow will show Company A invoicing Company B, and Company B invoicing Company C however the goods are shipped directly from Company A to Company C. Company C will therefore become liable to pay the VAT on the transaction under the reverse charge. More on Triangulation
More on Domestic Reverse Charge
The following countries have implemented domestic reverse-charge rules when a non-resident sells to local VAT registered businesses.
Austria generally do not apply the domestic reduced charge, only under the above category of “specific goods and services” where transactions involving gas/heat/electricity can be included.
Belgium have introduced an extended version of the reverse charge scheme, where the domestic reverse charge applies when transactions occur B2B if the customer has an establishment in Belgium, or is registered for VAT via a fiscal representative – it is not necessary for the seller to be registered for BE VAT. This is for both goods and services. In this case, the customer would be liable to report VAT on the transactions. The invoice must include the statement “Autoliquidation – Art 51 2,5″.
France have also extended the scheme of their domestic reverse charge to cover transactions being sold to companies who are VAT registered, irrespective of if the seller is established in France or registered for French VAT. The client, providing they are VAT registered in France would be liable for reporting VAT on the transaction. The invoice must include “Autoliquidation – Article 283-1 du CGI” to be able to use this scheme.
Germany only apply the rule on the supply of ‘sensitive’ goods, such as emission rights, consumer electronics, scrap meal.
Ireland similarly only apply the domestic rule to sales involving the supply of gas and electricity.
Italy have introduced the domestic scheme, whereby seller s not established in Italy can sell to a buyer who is VAT registered and reverse the VAT to them.
Netherlands covers the domestic reverse charge for sellers based outside of the country, providing that the client is permanently established within the Netherlands as an entrepreneur or a legal entity.
Poland have introduced the domestic reverse charge for B2B sales to companies who are established and VAT registered in Poland. The buyer does not need to be VAT registered in order to apply this.
Portugal’s domestic reverse charge has a few more requirements than some of the other countries, the buyer must be established and VAT registered in Portugal, or have fiscal representation in Portugal if they are not established there. The seller is not registered for VAT or established in Portugal.
Spain has extended the scheme covering non-Spanish based companies to reverse the VAT on goods transactions to the customer providing they have a VAT number in Spain. However, for services this would only apply if the seller wasn’t established in Spain but the service was.
Each of these rules allow for companies not based within the destination country to sell without having the obligation of registering for VAT.
