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VAT Reverse Charge: An Exception to General VAT Rules
According to the general rule set down in the Article 193 of the VAT Directive, VAT is payable by the person supplying the goods and services. However, in certain cases, where the supplier is not established in the country where the supply is deemed to take place for VAT purposes, the VAT liability may be shifted to the customer. This is known as the reverse charge mechanism.
They are two types of reverse charge: the mandatory reverse charge (Article 195 to 198 of the VAT Directive) and the optional reverse charge (Article 194 of the VAT Directive).
This optional reverse charge only applies to supplies of goods and services that are not subject to the general place-of-supply rule under Article 44 of the VAT Directive, where the supplier is not established in the Member State in which VAT is due.
In addition, each EU Member State may determine the conditions under which the optional reverse charge applies. In practice, this means that these conditions vary from one Member State to another.
One Option, 27 Variations
To understand the complexity of the optional reverse charge mechanism, the applicable conditions must be analysed from the perspective of each Member State. For instance, the first condition — relating to the type of goods or services supplied — varies significantly between France and Germany. In Germany, the mechanism applies only if the goods are supplied and installs or assembles on site in Germany whereas in France, it covers all goods.
Regarding the condition that the supplier must not be established in the relevant Member State, France simply requires the supplier not to be established in France. Poland, however, requires the foreign supplier to be neither established nor registered for VAT in Poland.
As regards additional domestic conditions, Belgium requires the customer to be either established in Belgium or VAT-registered there through a Belgian fiscal representative. Poland, however, restricts the application of the mechanism to supplies of goods where the customer is established in Poland.
As illustrated by the examples above, each Member State applies its own specific conditions regarding the reverse charge mechanism under Article 194 of the VAT Directive.
What are the consequences of Reverse Charge Errors?
Once a transaction meets the conditions listed, the optional reverse charge becomes mandatory. Thus, failure to reverse charge VAT can have a several consequences. For instance, in Italy, if a supplier wrongly charges VAT instead of applying the reverse charge, the buyer may be denied the right to deduct that VAT and faces severe penalties.
On the other hand, incorrectly applying the reverse charge could suppose that VAT due has not been paid to the administration. Therefore, the administration could request late interest charges and penalties in this regard.
To keep in mind
Optional reverse charge for non-resident suppliers can impact your transactions. You must pay attention to:
- The kind of supply being made.
- The characteristic of the client receiving the supply.
- The specific conditions implemented by each Member State.
- The mandatory wording and legal references required on the invoice.
By partnering with Ryan Belgium (formerly European VAT Desk), you can ensure smooth VAT compliance and maximize the cash flow advantages offered by the optional reverse charge for non-resident suppliers.
Any questions about VAT reverse charge? We offer a free video conference to assess your situation and provide you with a tailored solution.