Reverse Charge VAT - Everything You Need to Know
When a sale is made, it's normally the supplier who is obliged to account for any VAT due. Under some circumstances, though, it's the responsibility of the recipient. This is known as the reverse charge mechanism, and it’s important to be aware of when it applies to your business.
What is Reverse Charge VAT?
A reverse charge moves the responsibility for recording a VAT transaction from the seller to the buyer for goods or services bought in other European Union countries. It was introduced to simplify the processing of transactions across borders.
It removes or reduces the requirement for sellers to register for VAT in the country where the supply is made. And, any local VAT incurred by the supplier on costs relating to the service or goods provided under the reverse charge VAT mechanism may be recovered through EU VAT reclaim.
In most cases, a business will charge VAT on supplies and deduct it on purchases. The reverse charge system deviates from this rule with the supplier no longer required to include VAT in the invoice and the customer now paying and deducting the VAT simultaneously on their VAT return.
When it comes to paying VAT, the customer pays the net amount to the supplier, but on their VAT return will report the VAT amount as input VAT (manually calculated from the reverse charge invoice) and output VAT, the result being a nil effect. There are exceptions, though, where a full deduction is not permitted due to partial exemption rules.
Great Britain (England, Scotland, and Wales) left the EU single market and the VAT area in 2021 (Northern Ireland remained). As a result, there are different VAT reverse charge rules for Great Britain and Northern Ireland.
For businesses in Great Britain selling to the EU, reverse charge VAT will not apply in most cases. Generally, it will still apply when selling from Northern Ireland to the EU. If selling to Northern Ireland from Great Britain (and vice versa), you would follow the domestic reverse charge VAT procedure.
When does the VAT reverse charge apply?
There are many possible scenarios where the VAT reverse charge would apply. It will depend on a number of factors, though, including the country where you’re applying the reverse charge. There will also be exceptions to the rules governing reverse charges. Below are some examples of where a VAT reverse charge would be applicable.
A company making an intra-Community purchase of products (where items are sold to a customer in another EU member state) is typically responsible for paying the tax under the reverse charge system. If all requirements are met, the transaction's outgoing side, known as the intra-Community supply, is zero-rated.
A good reverse charge VAT example of this would be a Irish business buying goods from a German supplier for €10,000. The business would receive an invoice without VAT and on its VAT return would report the calculated amount of €2,000 (assuming the rate of 20% applies) as output VAT and €2,000 as input VAT.
Other instances where the reverse VAT charge applies include the supply of services to an EU VAT-registered business in another state, and, in some countries, the supply of goods on import or domestic supplies.
How to create a reverse VAT charge invoice
If you need to issue a reverse charge invoice, it should follow these general rules:
- There should be no VAT charge on the invoice, only the net amount for the goods or services. List the VAT as 0% just as you would for zero-rated or exempt sales.
- Make sure to reference the VAT reverse charge on the invoice. In most cases, something like ‘reverse charge’ or ‘reverse charge transaction’ will suffice.
- You will need to include your client's VAT number so make sure you have this information before submitting your invoice.
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