The reverse charge mechanism is a fundamental component of EU VAT that shifts the responsibility for declaring and paying VAT from the seller to the buyer. Rather than the supplier collecting VAT and remitting it to tax authorities, the customer self-assesses the VAT on their own VAT return. This mechanism simplifies cross-border trade by eliminating the need for suppliers to register for VAT in every country where they have customers.
Under normal VAT rules, a supplier charges VAT on their invoice, collects it from the customer, and pays it to the tax authority. The customer then claims this VAT back as input tax on their own VAT return. The reverse charge inverts this process: the supplier issues an invoice without VAT, and the customer accounts for the VAT themselves.
The customer treats the transaction as if they had both supplied and received the goods or services simultaneously. They declare output VAT (the VAT they would have charged if they were the supplier) and, at the same time, claim input VAT (the VAT they would normally reclaim as the customer). For businesses with full VAT recovery rights, these two entries cancel each other out, resulting in no net VAT payment.
This seemingly complicated mechanism serves an important purpose. Without reverse charge, a German business buying services from a French company would require the French company to register for German VAT, charge German VAT on its invoice, and file German VAT returns. With reverse charge, the French company invoices without VAT and has no German VAT obligations. The German customer handles everything domestically through their regular German VAT return.
The reverse charge mechanism applies in several defined situations under EU VAT rules:
When a business purchases goods from a supplier in another EU member state and the goods are transported across borders, the buyer accounts for VAT through reverse charge. The supplier zero-rates the supply (an intra-community supply), and the buyer declares the acquisition VAT in their country. This is the most common scenario for goods traded B2B within the EU.
The general rule for B2B services places the supply where the customer is established. For services supplied to a business customer in another country, the supplier does not charge VAT, and the customer applies reverse charge. This applies to most professional, consulting, technical, and similar services. The customer's VAT number determines whether they qualify as a business customer—which is why validating VAT numbers is essential.
Some EU countries apply domestic reverse charge rules to specific sectors prone to VAT fraud. Common examples include construction services, mobile phones and electronic devices, and certain commodities. These domestic reverse charge rules vary by country and exist alongside the cross-border reverse charge rules. Check your country's specific regulations if you operate in these sectors.
Correctly accounting for reverse charge transactions requires understanding the double entry that occurs on the buyer's VAT return:
You receive an invoice from your EU supplier showing the net amount without VAT. The invoice should indicate that reverse charge applies, often with a reference to "Reverse charge - Article 196 VAT Directive" for services or "Intra-community acquisition" for goods.
Apply your country's VAT rate to the invoice value. Use the rate that would apply if you had purchased the same goods or services domestically. For example, if you are in Germany and received a €1,000 service invoice, you would calculate €190 VAT at the 19% standard rate.
Enter this VAT amount in the output VAT section of your VAT return, in the boxes designated for reverse charge or intra-community acquisitions. This increases your VAT liability.
If you are entitled to recover input VAT on this purchase (which most fully taxable businesses are), enter the same amount in the input VAT section. This decreases your VAT liability by the same amount.
The net effect for businesses with full recovery rights is zero additional VAT to pay. However, you must still complete both entries—omitting either one creates errors in your VAT return that can trigger audits or penalties.
Reverse charge has different implications for businesses that cannot recover all their input VAT:
If your business makes both taxable and exempt supplies (like banks or insurance companies), you cannot recover 100% of input VAT. For reverse charge purchases, you must still declare the full output VAT but can only claim back the proportion corresponding to your taxable activities. This creates an actual VAT cost—you pay the difference between output VAT declared and input VAT recovered.
Businesses making only exempt supplies (such as certain financial services or education providers) have no input VAT recovery right. Reverse charge on purchases represents a real cost—you must declare output VAT but cannot claim any of it back. This mirrors what would happen if you purchased domestically and were charged VAT that you could not recover.
Government bodies and other non-taxable entities receiving services subject to reverse charge must still account for the VAT. They declare output VAT but typically have no recovery right, so reverse charge creates an actual VAT cost. This ensures non-taxable entities pay similar VAT as they would on domestic purchases.
Invoices for supplies subject to reverse charge have specific requirements:
As a supplier making a reverse charge supply, your invoice must include your VAT number, the customer's VAT number, and a clear indication that reverse charge applies. Common phrases include "VAT reverse charge applies," "Customer to account for VAT," or reference to the relevant VAT Directive article. Show the net amount without VAT—do not include a VAT line or total VAT amount.
As a buyer receiving reverse charge supplies, maintain the supplier's invoice plus your own VAT calculations. Some businesses create internal documents or journal entries showing the VAT self-assessment for audit trail purposes. Your accounting system should track reverse charge purchases separately from domestic purchases to support correct VAT return completion.
Avoid these frequent errors with reverse charge accounting:
Some businesses treat reverse charge invoices like ordinary purchases and simply expense the net amount without any VAT entries. This understates both output and input VAT, creating errors even if the net effect is zero. Tax authorities cross-check intra-community trade data, and missing reverse charge entries trigger enquiries.
Occasionally businesses receive an invoice with VAT incorrectly charged by the supplier, then also self-assess reverse charge VAT, effectively claiming the same input twice. If your supplier charges VAT when they should not have, request a corrected invoice rather than applying reverse charge on top.
Apply your country's VAT rate for the type of goods or services received, not the supplier's rate or a generic rate. If your country has a reduced rate for certain goods, use that reduced rate for reverse charge on those goods. Getting the rate wrong affects both output and input VAT accuracy.
Many VAT returns have specific boxes for reverse charge or intra-community acquisitions. Using the wrong boxes or omitting entries from required boxes causes reconciliation problems. Familiarize yourself with your country's VAT return format and where different transaction types should be reported.
As a supplier making reverse charge sales, you have specific obligations:
Validate the customer's VAT number through VIES to confirm they are a taxable person eligible for reverse charge treatment. Without a valid VAT number, you may need to charge VAT at your domestic rate instead of applying reverse charge.
Issue compliant invoices clearly indicating reverse charge applies. Include both VAT numbers and appropriate reverse charge notation.
Report cross-border sales on your VAT return in the correct boxes for zero-rated or exempt supplies. Additionally, report on EC Sales Lists (recapitulative statements) showing values by customer VAT number.
Maintain records of the transaction, VAT validation, and any transport documentation for goods supplies. These records support your zero-rate or reverse charge treatment if questioned.
Some scenarios require careful consideration of reverse charge rules:
When a single transaction includes both goods and services, determine which element predominates. If goods and services can be separated, apply appropriate rules to each component. If they form a single composite supply, treat the whole transaction according to the principal element.
When recharging costs to clients, maintain the original VAT treatment. A reverse charge cost passed on to another EU business should typically be recharged without VAT if the recharge itself constitutes a cross-border B2B supply. However, if you are acting as agent with disbursements, the treatment may differ.
If a reverse charge transaction is later adjusted (through credit notes, returns, or corrections), adjust both output and input VAT accordingly. The correction maintains the same reverse charge treatment as the original transaction, just with adjusted values.
