The Author of the Article
To keep in mind
- Reverse charge is a mechanism whereby the customer declares and pays the VAT directly to the tax authorities instead of the seller.
- Failure to declare a reverse charge transaction can result in heavy penalties. These penalties can be appealed if there is no detriment to the Treasure.
- It is vital that businesses understand and apply the reverse charge rules correctly to avoid negative financial and legal consequences.
What is the VAT reverse charge?
Anyone selling goods or services must issue an invoice including VAT to their customer. Normally, the supplier is responsible for invoicing VAT. However, there are specific situations in which this obligation is transferred, by law, to the customer himself.
In this context, the reverse charge mechanism involves two distinct stages:
- Firstly, the supplier issues an invoice without including VAT.
- Secondly, the customer self-assesses the VAT applicable to this purchase, by paying and recovering the VAT through his own local VAT return.
This procedure results in a financially neutral transaction.
What are the penalties for failing to self-assess VAT?
Failure to reverse charge VAT can, however, have a series of adverse consequences for the business concerned:
- Heavy financial penalties: Failure to reverse charge VAT can result in fines of up to several percent of the VAT due, with no upper limit. These proportional fines apply in 13 Member States: Belgium (20%), Bulgaria, Cyprus, Denmark, Finland, France (5%), Greece, Hungary, Lithuania, Malta, Slovakia, Spain (5%) and Sweden (5%). In other countries, fines may be set at a flat rate.
- Increased risk of tax audits: A reverse charge error may trigger an in-depth tax audit, bringing to light other accounting irregularities.
- Damage to the company's reputation: Companies subject to reverse-charge tax audits may find their reputation tarnished among their business partners.
Let's take an example
A Belgian company receives a VAT-free invoice from its German supplier for the purchase of equipment worth €1,000,000, but forgets to self-assess Belgian VAT on this intra-Community acquisition.
The Belgian tax authorities became aware of this through the exchange of intra-Community information, asked the German tax authorities to question the supplier about the transaction and then initiated a tax audit of the Belgian company with a penalty of 20% of the undeclared VAT, with no ceiling, i.e. €42,000!
Can the penalties be challenged?
The application of penalties obviously raises the question of the proportionality between the fault committed by the company and the actual damage caused to the State.
The debate is still raging in Belgium (witness the ECJ ruling C-418/22 Cezam against the company). In France, the Constitutional Court, in a questionable ruling, validated the principle of a 5% fine (Conseil d'État, no. 462398 of 14 June 2022). To put it another way, there are serious arguments to be made for contesting the fines all around Europe, but the game is far from won in advance.
The VAT expert's eye
To avoid getting into a lurch if you forget to reverse charge, it is advisable to adopt the following best practices:
- Understand the specific rules: It is essential to have a good understanding of the reverse charge rules applicable to your business sector and to keep abreast of legislative developments.
- Train staff: Regular staff training on reverse charge tax obligations is essential to minimise the risk of error.
- Implement internal controls: Regular checks will enable any omissions to be detected quickly and any errors corrected.
- Call on our experts: Consulting our VAT experts can provide additional security and guaranteed compliance of all legal obligations.
Any questions about VAT reverse charge? We offer a free video conference to assess your situation and provide you with a tailored solution.