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VAT in short: how does reverse charge VAT work?

If usually a company charges VAT when supplying goods or services and deducts the VAT paid when buying supplies, a reverse charge VAT is a distinct procedure that allows regulators to follow the number of interactions in the economy, including transactions where no VAT was charged.

A reverse charge mechanism is especially important in the EU and the UK. It is used in situations when for tax purposes, the customer accounts for VAT instead of the seller.

The reverse charge VAT is commonly applied in cases when services are bought from a third-country provider when the seller of services is not required to register for VAT or similar.

For administrative purposes in such events, the buyer acts as the supplier and a recipient at the same time, accounting for an output tax – supplier‘s sale – and an input tax. If the input is taxable supplies for the buyer, the reverse charge mechanism does not create any VAT obligations.

When accounting for a reverse charge, a company must include output, input, and full supply value in the VAT returns. Please note that the value of the supply should be accurate even in cases when the transaction did not fully consist of money.

Typically, the company sending the products or selling services must mention the reverse charge on their invoice.

Do you want to learn more about the reverse charge procedure? Get in touch.

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