Reverse charge VAT is a mechanism of calculating VAT that shifts the responsibility for paying value-added tax (VAT) from the supplier to the buyer of a good or service. It is a deviation from the general rule where businesses charge VAT on supplies and deduct VAT on purchases. The reverse charge mechanism is used when buying goods or services from suppliers in other EU countries, and it moves the responsibility for the recording of a VAT transaction from the seller to the buyer for that good or service. This eliminates or reduces the obligation for sellers to VAT register in the country where the supply is made. The reverse charge mechanism was created when the European Union Value Added Tax system was reformed for the launch of the single market in 1993, to help simplify the VAT reporting across the 27 member states.
Under the reverse charge mechanism, the supplier issues an invoice without VAT, and indicates a reference to the reverse charge mechanism on it. The buyer then calculates and pays any VAT due to the tax authorities and reports this as part of their VAT return. The reverse charge mechanism applies in different kinds of transactions, both domestic and intra-Community. The services under the reverse charge will count towards their own VAT registration threshold.
The reverse charge mechanism is meant to reduce the administrative and compliance burden on foreign suppliers providing services in jurisdictions where they do not have a presence. It also reduces the risk of non-payment of VAT by non-resident taxpayers.
