Reverse charge
What is reverse charge?
Reverse charge is a VAT rule that moves liability for the tax from the supplier to the business customer, so the supplier invoices without VAT and the customer declares it to its own tax authority. In the EU, it applies mainly to cross-border business-to-business supplies of services under Article 196 of Council Directive 2006/112/EC.
The rule exists so that a supplier selling services across borders doesn't have to register for VAT in every member state where it has customers. Shifting the liability to the customer keeps the tax in the country where the service is consumed while leaving a single VAT registration on the supplier's side. Member states also apply reverse charge domestically in sectors exposed to missing-trader fraud, where collecting VAT from the seller has proved unreliable.
Note: reverse charge is a tax accounting rule and has nothing to do with , which returns funds to a cardholder after a transaction has been processed.
Key facts
- Legal basis: Article 196 of Council Directive 2006/112/EC for cross-border B2B services. Articles 194, 199 and 199a set out domestic reverse charge options each member state adopts at its own discretion.
- Who accounts for the VAT: the customer, at the VAT rate of the customer's own country.
- VAT on the invoice: none. The invoice shows the net amount only.
- Required invoice mention: "Reverse charge", under Article 226(11a) of Directive 2006/112/EC.
- Also known as: reverse charge mechanism, RCM.
- Does not apply to: B2C supplies. A private consumer never self-accounts for VAT, so the supplier charges it in the usual way.
Who it applies to
Reverse charge applies where both parties are taxable persons holding valid VAT identification numbers, and the supplier isn't established in the member state where the VAT is due. The main scenarios:
- Cross-border B2B services inside the EU. Under Article 44, the place of supply for B2B services is the customer's country, so the customer accounts for the VAT there.
- Non-EU suppliers selling services to VAT-registered EU businesses. The EU customer self-accounts rather than the supplier registering locally.
- Domestic supplies in designated sectors. Construction work, scrap metal, certain electronics and greenhouse gas emission allowances are common examples. The exact list is set by each member state and changes over time.
This reaches further into payments than it first appears. When a , gateway or fraud vendor established in one member state invoices a in another, the fall under the cross-border B2B services rule, and the merchant self-accounts for the VAT on them. Under a model the picture shifts again: the merchant of record is the contracting seller to the end customer and handles VAT on that sale itself, so reverse charge governs its dealings with business suppliers and business customers rather than the consumer transaction.
How it works in practice
- Confirm the customer is a taxable person. The supplier validates the customer's VAT identification number in the European Commission's VIES system and keeps dated evidence of the check. A valid result at the time of supply is the supplier's primary defence in an audit.
- Establish the place of supply. For B2B services, Article 44 puts it in the customer's country, which is what makes the customer liable for the VAT.
- Issue the invoice without VAT. The invoice shows the net amount, both parties' VAT identification numbers, and the mandatory "Reverse charge" mention required by Article 226(11a).
- Report the supply. The supplier reports the transaction on a recapitulative statement, commonly called the EC Sales List, required by Articles 262–264 of the VAT Directive. Removing the VAT charge does not remove the reporting obligation.
- The customer self-accounts. The customer declares output VAT at its domestic rate and, where it has full recovery rights, deducts the same amount as input VAT in the same return. The entry nets to zero in cash terms for a fully taxable business.
Cross-border VAT fraud is also the target of , which requires payment service providers to report cross-border payment data to EU tax authorities so that declared and actual flows can be compared.
Penalties for non-compliance
- Invalid customer VAT number. If the number wasn't valid at the time of supply, the tax authority can treat the supply as domestic and assess the uncharged VAT against the supplier, along with interest.
- Missing or late recapitulative statements. Penalties are set by each member state and apply even where no VAT was collected, because the statement is how authorities cross-check the customer's self-assessment.
- Customer failure to self-account. The customer that omits the output VAT entry owes the tax plus any national penalty, and loses the corresponding input VAT deduction if the error falls outside the correction window.
- Missing invoice wording. An invoice without the Article 226(11a) mention is not compliant, which gives the customer grounds to reject it and the authority grounds to challenge the treatment.
