In the case of most B2B goods and services transactions, VAT is settled by the seller. Reverse charge VAT mechanism prevalent in the EU differs from the regular VAT settlement. In case of certain B2B transactions, the buyer declares VAT. Launched in 1993, queries about the scheme and its aspects are still among the most frequently asked business taxation questions in the EU.
What is reverse charge VAT?
VAT reverse charge is a mechanism that shifts the responsibility of recording the VAT from the seller to the buyer of a good or service. The scheme facilitates the opportunity for the buyer to submit VAT returns without the need for the seller to register as a VAT payer in the country to which the goods or services where supplied.
Why was the reverse VAT adopted?
In 1993, the European Union Value Added Tax system was amended to prepare for the launch of the single market. At that time, VAT reporting was among the most troubling aspects of merging the different regulations of the EU member countries to work as a united market.
Reverse charge mechanism was established to simplify the VAT reporting across the member states of the EU. It enabled providers of services and certain goods to avoid registering for VAT in all of the EU countries to which they export their services and goods. This way, business collaboration and the movement of goods and services between the EU member states became easier.
How does it work?
Whenever reverse charge scheme is in action, the recipient of the goods or services declares both their purchase VAT and the sale VAT in their VAT return (as if the buyer had supplied the services or goods themselves). In such a manner, both values cancel each other from a payment perspective. However, the tax authorities can still capture the transaction that took place and get an estimate of the intensity of the B2B collaboration as well as the value added.
Company owners must note that reverse charge VAT regulations are not unified in all of the EU countries. Before proceeding to complete a reverse charge transaction, the traders are recommended to check both the common EU regulation documents as well as the materials of the tax authorities of the country where the transaction takes place.
What transactions are eligible for the reverse charge?
As mentioned above, reverse charge is most used for business-to-business transactions that include services or goods. No requirements or specifications are applied to the size of businesses that take part in such transactions to fall upon the reverse charge mechanism. However, both parties need to be VAT-registered.
Businesses founded in non-EU countries that intend to complete intra-Community transactions can also take part in the reverse charge mechanism. In such cases, they need to use the services of an EU-based agent to facilitate the trade.
VAT reverse charge in practice
Companies much appropriately mark reverse charge transactions in all of the invoices. Usually, this means including a note that VAT is due to the recipient, and identifying the reverse charge of VAT. In such cases, it is best to issue a full VAT invoice, including the VAT registration details of both the supplier and the buyer.
When calculating for the reverse charge, one must keep in mind that the VAT rate on the side of the supplier should be considered as if the supplier was operating in the country of the transaction.
No special reverse VAT calculator is needed to account for reverse charge transactions properly. The amount paid to the supplier is held to be the taxable value, and the reverse VAT is calculated by multiplying it by the VAT rate applicable (for example, 20%). This VAT value should be added both under sales and under purchases sections of the beneficiary. To calculate reverse charge VAT, one should not use the reverse VAT calculator that generally comes in handy to the traders who want to present customers with rounded prices (incl. VAT).