Reverse Charge. Reverse charge. What does reverse charge mean? Is the international term reverse charge and the UK reverse charge the same? Reverse charge EU? Are the destination principle and reverse charge VAT actually the same term for the same transaction?
Reverse charge EU
On an invoice I received from a foreign company, it says reverse charge – what does that mean? In English, this is called reverse charge. In practice, this means that you as the buyer, instead of the seller, calculate and pay the VAT.
Normally, the seller invoices the VAT and then pays it to the tax office. With the reverse charge it is instead the buyer who has to charge the VAT and pay it to the tax office. Usually, it’s just a calculation with input and output vat which cancels each other out.
Examples of reverse charge:
For example, you send an invoice without VAT to a company in Austria. The Austrian firm then calculates the Austrian VAT for the amount and then pays it to the Austrian tax office (or just calculates output VAT and deducts the input VAT directly). So in this case it is the buyer who calculates and pays the tax, so it is a reverse tax liability.
Reverse charge was introduced when the EU was created to make it easier to deal with VAT when trading between countries. This way, the seller does not have to register for VAT in the country to which he is selling. Nowadays, the VAT system in the EU has become significantly more complicated and there are a lot of exceptions. As if it wasn’t complicated enough, new rules for invoicing electronic services were introduced in 2015. Yet more changes 1 July 2021. In this case, sellers must be registered for VAT in the customer’s country, or they must use the MOSS/OSS service to report and pay the local VAT on the invoice to the customer (private individual).
Reverse charge between businesses
When you invoice between businesses, reverse charge still makes it pretty simple. So you invoice the buying business without VAT and refer to a policy that explains why you are invoicing without VAT. Instead, if your own business buys from a business within the EU, you have to calculate VAT on the purchase yourself. The EU is in the process of replacing this rule with the country of destination principle in 2021, but it may still be possible to do reverse charge on B2B transactions after 1 July 2022..
Destination principle vs. reverse charge
No, they are not the same thing. They are in fact two quite different principles.
Destination principle: Billing is done by the seller with VAT and the tax rate of the buyer’s country. So, for example, if you sell an electronic service to a Swedish private customer, you charge 25% Swedish VAT.
Reverse charge: The buyer charges and pays the VAT on the purchase.
So the destination principle requires you to know the VAT regulations and rates around the world, and the EU is in the process of phasing in this principle for all trade within the EU, which will cause complete chaos. The destination principle already applies to electronic services to private customers within the EU. But the plan is to extend this principle to normal services and goods as early as 1 July 2021.