This section covers the applicable reverse charge rules on supplies by non-established companies (art. 194 of the EU VAT Directive); reverse charge on B2B services (art. 196) and reverse charge on certain specific goods (art 199 where allowed by the EC). We have also included information on Use and Enjoyment rules as an exception to the B2B rule on services.
Normally VAT is due by the supplier, who pays VAT to the tax authorities on all supplies after deducting any VAT borne on purchases. However, when the reverse charge mechanism applies, VAT is paid and deducted by the customer in the VAT return. In practice, the supplier issues an invoice without VAT and the customer manually calculates the VAT amount, reporting this amount as output VAT and input VAT in the VAT return. This scheme has a nil cashflow impact for the supplier and customer (unless the customer doesn’t have a full right to deduct VAT). From an accounting perspective, every purchase under the reverse charge mechanism should have an automatic posting into the input and output VAT accounts.
In the European Union, reverse charge has been largely extended to domestic transactions as a measure to counteract VAT carousel fraud. It is important that foreign companies and businesses trading with certain goods and services are aware of the reverse charge rules in every country, as these often require special VAT obligations and additional VAT returns.