What is the VAT reverse charge?

The reverse charge mechanism is a tax system where the responsibility for reporting and paying VAT shifts from the seller to the buyer of goods or services. This is commonly used in cross-border transactions within the EU or in specific domestic cases to prevent tax evasion and reduce administrative burdens for suppliers. Under this mechanism, the buyer must declare both the input and output VAT, effectively making it a self-accounting process.

How does this relate to U.S. companies?

The reverse charge mechanism does not apply to transactions within the United States, as the U.S. uses a sales tax system rather than value-added tax (VAT). However, U.S. businesses selling to VAT-registered companies in the EU may need to comply with reverse charge rules when invoicing their customers. When a U.S.-based company sells goods or services to an EU-registered business, the place of taxation is determined by the final destination of the goods or service. If the buyer has a valid VAT number, the supplier does not charge VAT. Instead, the buyer accounts for and pays VAT under the reverse charge mechanism.

When do U.S. businesses need to register for VAT?

A U.S. business does not automatically need to register for VAT in the EU. However, VAT registration may be required if the company:

• Sells digital services (e.g., SaaS, e-books) to EU consumers: Must register under the EU VAT One-Stop Shop (OSS) system.
• Imports and sells physical goods in the EU: Must register in the country of importation.
• Has a physical presence or warehouse in the EU: Must register for VAT in that country.
• Makes high-volume sales to EU consumers (B2C) under distance selling rules: May need local VAT registration.

How does VAT work in invoicing?

Generally, when issuing an invoice within the EU, VAT is usually included in the total price. This means that the customer pays the full amount, including VAT. However, as a supplier, you are not allowed to retain this tax but must remit it to the tax authorities. With the reverse charge mechanism, this process changes: instead of the seller charging and collecting VAT, the responsibility shifts to the buyer, who must report and pay the tax directly to their national tax authority.

Example

Goods are imported from the United States to France, where entrepreneur A acquires and subsequently passes them on to entrepreneur B in Great Britain. Entrepreneur A issues an invoice without including VAT figures. Entrepreneur B sells the goods from entrepreneur A to entrepreneur C in Great Britain. This time, however, entrepreneur B issues an invoice with relevant VAT figures. The VAT is refunded to entrepreneur C by the revenue office in the form of an input tax. However, instead of paying the VAT to the revenue office, entrepreneur B disappears from the market before the tax is due. From that point on, he is referred to as a “missing trader.” Entrepreneur C then sells the goods back to entrepreneur A and the entire process is repeated.

What is the purpose of the reverse charge mechanism?

In practice, the reverse charge mechanism can simplify VAT compliance—at least for suppliers—by reducing their administrative burden. More importantly, however, this regulation is designed to prevent abuse and tax fraud.

For example, reverse charge helps combat so-called carousel fraud, where cross-border transactions, which are tax-exempt for the supplier, are exploited to evade VAT payments.

Who does it concern?

The reverse charge mechanism applies to B2B transactions within the EU where the buyer is VAT-registered. If a U.S.-based company wishes to conduct intra-border transactions within Europe, it can appoint an EU-based agent to handle VAT compliance. However, VAT laws vary by country, and certain EU countries apply different reverse charge rules. Each Member State has the flexibility to determine which transactions fall under this mechanism.

Here’s a quick look at who is liable:

• Non-EU businesses selling to EU customers: U.S. companies selling goods or services to VAT-registered businesses in the EU must consider reverse charge rules.
• B2B transactions: It typically applies to business-to-business (B2B) sales, where the buyer, not the seller, is responsible for VAT reporting.
• Cross-border transactions: If goods are supplied across different EU Member States, reverse charge often applies to avoid double taxation and simplify compliance.

Key considerations for U.S. businesses

• VAT registration: Certain U.S. businesses might be required to obtain a VAT registration in the EU, depending on their sales activities.
• VAT compliance: It is essential to ensure that invoices accurately reflect whether the reverse charge mechanism applies.
• Country-specific VAT regulations: Since VAT laws vary across EU Member States, businesses must adhere to the specific regulations of each country they operate in.

How to indicate reverse charge on invoices (Example and template)

If you are a U.S.-based business providing services or goods to a VAT-registered company in the EU, you may need to apply the reverse charge mechanism. In this case, your invoice should not include VAT, and you must clearly indicate that the buyer is responsible for VAT reporting.

There is no universal mandatory wording for reverse charge invoices, but it is recommended to include a statement such as:

• VAT due to the recipient
• Recipient is liable for VAT

For transactions with non-English-speaking EU customers, you may also include the reverse charge notice in the respective local language (see table below for examples).

This ensures that U.S. businesses invoicing EU clients correctly comply with VAT regulations when the reverse charge mechanism applies.

Important notes

In addition to this reverse charge notice, invoices for cross-border transactions within the EU must include both the supplier’s and the recipient’s VAT identification numbers. Make sure you do not to mistakenly include VAT on a reverse charge invoice, as this can easily happen out of habit.

Please refer to the legal disclaimer for this article.