VAT Reverse Charge Explained. How the reverse charge works

Photo: Vat-digital.com

The VAT reverse charge mechanism shifts the obligation to report and pay VAT from the seller to the buyer. In practice, the supplier issues an invoice without VAT, while the customer accounts for the VAT in their own VAT return. The mechanism was introduced to prevent businesses from having to register for VAT in another EU Member State solely to declare VAT on cross-border transactions.

Reverse charge has become a cornerstone of the EU VAT system, particularly for B2B transactions, where it significantly reduces administrative burdens and compliance costs.

Mandatory and optional application

Under EU VAT law, the reverse charge is mandatory for B2B transactions where the supplier is not established in the Member State in which VAT is due and the customer is VAT-registered there. In such cases, the VAT liability automatically shifts to the customer, and the foreign supplier is not required to obtain a local VAT registration.

At the same time, EU legislation allows Member States to apply the reverse charge on an optional basis for specific transactions or sectors. These national extensions are often introduced to combat VAT fraud or address sectors considered particularly vulnerable to abuse.

Country-specific approaches

In France, the reverse charge applies when goods or services are supplied in France by a supplier not established there to a VAT-registered French customer. The supplier is therefore relieved from VAT registration obligations. France also applies optional reverse charge regimes in sectors such as mobile telephony and construction subcontracting. Since 1 January 2022, import VAT has been subject to automatic reverse charge for importers holding a French VAT number, with tax administration transferred from customs to the tax authorities.

Spain has similarly broadened the scope of the reverse charge. It applies where the supplier is not established in Spain, the service is deemed to be supplied in Spain under B2B rules, and the customer is VAT-registered in Spain. This framework significantly limits the need for foreign suppliers to register locally.

Portugal has expanded its reverse charge mechanism to situations where the supplier is not established in the country and has no fiscal representative, provided that the customer is VAT-registered or acts through a representative. Recent reforms have extended the regime to additional transactions involving foreign suppliers without a permanent establishment.

Why the reverse charge matters

The VAT reverse charge plays a crucial role in simplifying cross-border trade within the EU while strengthening tax enforcement in high-risk sectors. It reduces compliance costs for foreign suppliers and allows tax authorities to better control VAT collection.

Nevertheless, the practical application of the reverse charge varies significantly across Member States, making local analysis essential for businesses operating internationally.

As reported by International Investment experts, the VAT reverse charge is a fundamental compliance mechanism for cross-border business in the EU. While it offers clear administrative benefits, incorrect application can expose companies to VAT reassessments and penalties, underlining the importance of understanding both EU-wide principles and country-specific rules.