What is the Reverse Charge mechanism?
And when can it be used?
In order to facilitate trade between the European Union (EU) countries, the EU created the Reverse Charge mechanism. The Reverse Charge moves the responsibility for the recording of a VAT transaction from the VAT registered seller to the VAT registered buyer for the good or service sold between 2 EU based businesses.
This removes the burden of VAT for the business customer and eliminates the need for the seller to VAT register in the business customer’s country. When a transaction is subject to Reverse Charge, the seller will issue an invoice containing the customer’s valid VAT number (this can be checked on the EC VIES Website and the obligatory wording:
- For services: “VAT Exempt intra-community supply of services – Article 44 and 196 Directive 2006/112/EC”
- For goods: “VAT exempt intra-Community transfer – article 138, 2, c) Directive 2006/112/EC”
An EC Sales List will also need to be completed which details which EU B2B customers the Reverse Charge was applied to.
The recipient of the goods or services reports both their purchase (input VAT) and the supplier’s sale (output VAT) in their local VAT return.