Reverse charge - What is the reverse charge?
The reverse charge refers to intra-community EU transactions, when the VAT is recorded by the buyer instead of the seller
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The reverse charge applies to transactions that occur between businesses in two different countries within the EU. In typical transactions within a country, it is the responsibility of the seller to record VAT on their sales. The reverse charge transfers this responsibility to the buyer.
Why is reverse charge used?
The reverse charge was introduced in the EU to simplify the processing of transactions across borders, and for businesses that aren’t VAT registered in the country in which their business is based.
In using the reverse charge, the buyer records both the supplier’s output VAT and their own input VAT amounts. These effectively offset each other out and can be viewed by the authorities, however they don’t have as high an impact on the transaction as would occur if the seller were to undertake the recording of VAT.
When does reverse charge apply?
The reverse charge applies primarily in business-to-business (B2B) transactions. In business-to-customer (B2C) payments, the reverse charge does not apply, though other EU regulations might be applicable.
The reverse charge generally applies in the three following scenarios:
- When goods are sold across borders within the EU from one VAT registered business to another
- When certain services such as those relating to property that cannot be moved as well as live events, which occur in the same location as the supplier
- Import of goods or domestic supply of goods in certain countries
In general, the first category is the main one that concerns businesses operating across borders within the EU, as well as the UK currently.
How does reverse charge work?
The reverse charge allows the purchase to be handled as though the buyer is also their own supplier. Although this is not the actual case, for the purposes of tax, this allows the seller to more easily process the transaction.
As long as the buyer is VAT registered and is entitled to all VAT regulations and benefits (is not partially blocked or exempt, for example), then the seller’s VAT combined with the buyer’s VAT will cause the total to be neutral.
This process allows tax authorities on both sides to see that the regulations were followed concerning cross-border transactions.
What about businesses not registered for VAT?
For businesses operating in the EU outside of their base country, the reverse charge for intra-community transactions might cause them to have to become VAT registered.
Reverse charge and invoicing & accounting software
Creating invoices for customers based in other EU countries means applying the reverse charge. It must also be considered when registering expenses such as goods imported from other EU countries.
With accounting & invoicing software like Debitoor, as soon as you indicate that a transaction is occurring with a buyer or supplier across EU borders, the VAT is automatically updated accordingly.