The reverse charge mechanism
The customers often approach me with the questions concerning VAT and the possible complications with this tax. The Value Added Tax, as general tax focused on the consumption, is based on the mechanism that it is the professional or enterpreneur who is a taxable person. The taxable event therefore is to sell a good or service, not to buy. Otherwise – it would not make sense, because if the tax payer was the final consumer, he would be obliged to present every single time a tax declaration while buying the good or service. But this construction does not apply in the case of reverse VAT charge.
The reverse charge mechanism shifts this obligation from the seller to the buyer. In this case, the goods or services will be taxed in the Member State (any country in Europe) where they are received.
There are two different kind of transactions: B2B and B2C.
• B2B (business to business) means that the enterpreneurs are making transactions between each other. Each of them is an important part of the chain of distribution and production.
• B2C (business to customer) is a type of transaction which entails an enterpreneur and a customer, where the latter is a final element of the chain of consumption of goods and services.
This article is about B2B transactions within European companies, not situated in the same country.
How does the reversed charge work?
To whom this mechanism applies? To buyers and sellers of products within the EU (intra-community transactions). Therefore, if the byuer is not registered for the VAT purposes, the transfer of the obligation to settle VAT from the seller to the buyer would not be applicable.
When this mechanism applies? When you either sell or buy the goods or products within the EU framework. Important thing to note is that this particular tax obligation is applicable only for the business activity. If the goods or services are acquired not for business purposes, the general legal idea will apply and the buyer will be the one responsible for paying the VAT.
The seller should present the invoince, but he should indicate expressly that the invoice does not include the VAT rate, as the shift of burden of payment of VAT applies in this case. This means that in such a situation, it is the service recipent´s responsibility to show and account for this tax.
Of course the buyer, as an active VAT taxpayer, can deduct this amount. Therefore, it must present the input VAT and the output VAT in the tax return.
If you are a good or service provider, when issuing an invoice, remember that an invoice documenting the intra-comminuty transactions does not include the tax rate and the amount of tax.
Example: a company located in Germany sells products in Germany – the 19% VAT rate applies. But when a German company sells procudts in the Netherlands (that means – outside the home country, but still winthin EU) – 0 % VAT rate applies for the selling company and it is the obligation of the contractor to include the VAT rate in the tax return. The Dutch company, acting as a recipent of the products, can deduct the amount of this tax in its tax return. The good provider should be in possession of the VAT indentification number of the Dutch company.
- the seller did not remove the VAT rate from the invoince – it is possible to claim for the VAT refund, but depending on the time. At the end of the quarter, it is too late to claim to have the VAT amount back from the buyer. For this reason, it is even more important to have in mind to claim it just after the transaction;
- there is lack of the reference to the reversal of the tax;
- complications in the cash flow – lack of the VAT payment from the contractor may cause problems in the cash flow, so that the enterpreneurs should have in mind if the loss of those money would be meaningful in case of managing the business and if other ources of funding should be found;
- lack of the possibility of deduction in the tax return – when the VAT is not charged in the correct way, it cannot be declared as the input tax.
Why was this mechanism introduced? To prevent fraud within EU countries, as many of the companies took the advantage of the cross-border VAT exemption and have been quite quick to note that this mechanism provides an opportunity to illicit enrichment.
Thank you very much for reading this article. Tax&Law Spain can help you to overcome other complex matters regarding the VAT. If you have questions considering the scope of reverse VAT charge mechanism and you are looking for a professional advice and guidance, you can contact me via WhattsApp (+49 1520 8381499) or e-mail (email@example.com).