The reverse charge mechanism is a VAT rule applicable under European Union (EU) law for certain transactions. It is commonly used in cross-border B2B (business-to-business) transactions within the EU and for specific goods or services. Under this mechanism, VAT is not included in the supplier’s invoice, and the recipient is responsible for calculating and declaring the VAT.
When Does the Reverse Charge Apply?
The supplier issues an invoice without VAT, indicating that the reverse charge mechanism applies.
The recipient calculates the VAT at their country’s applicable rate and reports it in their VAT return as both output VAT (payable) and, if eligible, input VAT (deductible).
If the recipient is VAT-registered, the process is generally tax-neutral, meaning no additional cost.
Scenarios Where the Reverse Charge Mechanism Applies
Cross-Border Services (EU B2B Transactions)
For services provided between businesses in different EU countries, VAT is not charged on the supplier’s invoice. Instead, the recipient must declare the VAT in their country under the reverse charge mechanism.
Services from Non-EU Countries
When services are provided by companies located outside the EU, the recipient within the EU must account for the VAT in their own country.
How It Works
The recipient calculates the VAT based on the applicable rate in their country.
The VAT is then declared in the recipient’s VAT return.
For VAT-registered entities, the amount declared as output VAT (payable) can generally be reclaimed as input VAT (deductible), resulting in no financial impact.
Why Our Invoices Do Not Include VAT
For cross-border B2B transactions within the EU, suppliers are legally required to issue invoices without VAT when the recipient is VAT-registered in another EU country. The reverse charge mechanism ensures that VAT is declared and paid in the recipient’s country, in compliance with EU tax regulations.
How to Avoid the Reverse Charge Mechanism?
In intra-community B2B transactions, the reverse charge is mandatory when the recipient has a valid VAT number registered for intra-community transactions. However, VAT can be included directly on the invoice in the following situations:
The recipient’s VAT number is not registered for intra-community transactions (VIES):
If your company does not have a valid VAT number for intra-community transactions, the supplier is required to charge VAT directly on the invoice, according to the tax rules of their country.
The transaction occurs within the same country:
When both the supplier and buyer are located in the same country, VAT is normally applied to the invoice unless a specific exemption applies.
The recipient is not a business (B2C):
For private customers (consumers) or entities not registered for VAT, the supplier must include VAT on the invoice.