The reverse charge procedure is the reversal of the tax liability and has VAT consequences, especially for online sellers. According to this regulation, it is the service recipient (customer) and not the service provider who must pay the VAT. In the following article we will explain in detail what exactly has to be considered with the Reverse Charge System by means of examples.
Last Updated on 29 October 2020
Basic Regulation without Reverse Charge System
Usually it looks like this: An entrepreneur takes on the role of the performer. The entrepreneur provides a service to a domestic recipient. In this case, it is a turnover that was carried out by an entrepreneur for remuneration within the scope of his business. This is a taxable turnover.
This tax is then also paid by the entrepreneur to the tax office. In this case the entrepreneur is the tax debtor. He has paid the tax for the tax office and then passes it on to the tax office through the advance VAT return.
But how does the situation change if the entrepreneur provides his services for foreigners abroad? This is where the reverse charge system comes into play.
More articles about Reverse-Charge
When selling services/goods from one EU member state to another, the tax liability changes – from the service provider to the recipient. This means when someone from EU country A is selling services/goods to EU country B, VAT is paid in country B by the recipient and not by the provider in country A. This must be stated in the issued invoice but one thing after another. Let’s start with an example.
Take a German property developer as an example. He is responsible for building a new skyscraper in Frankfurt.
Since he now commissions a subcontractor from Austria to do small jobs, he receives an invoice after the work is completed. Now the question arises as to what happens to the VAT, what the invoice should look like and which state is entitled to the resulting tax.
In the field of VAT, there is a recipient of services (entrepreneur / consumer) and a provider (entrepreneur). The VAT is a consumer tax. As the name suggests, it is to be paid by the consumer. The entrepreneur collects the tax and then pays it to the tax office. For entrepreneurs, VAT is therefore a transitory item.
In terms of value added tax, this is an additional service. This is taxable in Germany. Now the sub-contractor issues his invoice. This invoice must not show any VAT and the legal regulations must be observed.
Now it comes to the Reverse Charge. Basically, this means that the recipient of the service now becomes the tax debtor. The German property developer has to pay VAT to the tax office and not the person from Austria. In return, however, he may claim the input tax.
Beispiel Nr. 2
Another example would be a German translator. The entrepreneur supports a French tax office with translations.
First and foremost, the question of tax liability must be clarified. This is clearly another reverse charge process.
Now the reverse charge procedure comes to light from a different perspective. The service is not taxable in Germany. The tax liability is transferred to the French tax consultant. Therefore, the invoice of the translator has to contain a phrase like “Reverse-Charge: Recipient is liable for VAT”.
This must now pay the VAT due on the service amount to the tax office. The reverse-charge procedure is intended to prevent the state from losing taxes.
What happens to the input tax after the entrepreneur has paid VAT? The French entrepreneur can now claim the VAT he paid as input tax again. This means that the tax consultant is not put at a disadvantage.
The reverse charge procedure or system offers many advantages. Although the German entrepreneur pays the VAT to the tax office, he can claim the same amount of VAT as input tax.
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Indeed, the entrepreneur has the effort to submit an ec sales list but this should be no problem for most tax accountants. If you are looking for assistance in this area, our VAT automation software and our team of European tax accountants could be the solution of choice for you.
When an entrepreneur provides a service or makes a delivery, he usually writes an invoice afterwards. This is even stipulated by law. If the intra-Community supply is deemed to have taken place, the invoice must be issued by the 15th of the following month.
Invoices already contain some important points. An invoice must contain the following elements:
- Name and address of the service provider and the service recipient
- Tax number or VAT identification number
- A sequential invoice number and indication of the invoice date
- Description of the service and the service period
- Remuneration broken down by tax rates
- The applicable tax rate and the related remuneration
In the case of a reverse charge procedure, however, some points need to be added to the invoice:
- The VAT identification number of the service provider and the service recipient
- Net amount, no indication of tax rate
- Indication that the tax debtor is the recipient of the service; this is even required by law, an example would be “tax debtor is the recipient of the service” or “Reverse-Charge: Recipient of service is liable for VAT”.
- Reference to the storage obligations
Invoices are subject to certain storage obligations. An invoice must be stored by the entrepreneur for ten years. The storage period begins at the end of the calendar year. This means the cut-off date is 31.12 of the respective year. This regulation concerns outgoing and incoming invoices.
These components are intended to keep the reverse charge procedure simple and ensure that no tax fraud takes place.
Marking Reverse Charge on invoices – examples for various languages
If an invoice is sent abroad and the reverse charge procedure is applied, then this very tax liability must be indicated on the invoice in the respective national language. Alternatively, it is also possible to submit an additional invoice in English or an invoice in two languages, in English and in the local language.
To avoid long searches, we have collected some country-specific terms here:
|EU Country||Reverse charge in the local language|
|Latvia||Nodokļa apgrieztā maksāšana|
|Slovakia||Prenesenie daňovej povinnosti|
|Spain||Inversión del sujeto pasivo|
|Czech Republic||Daň odvede zákazník|
|United Kingdom||Reverse Charge|
Observe Delivery Threshold
What happens in international trade, e.g. when a German Amazon trader sells his goods to a Polish consumer?
The entrepreneur must pay attention to so-called delivery thresholds when selling his goods. If he exceeds these thresholds, he must submit an advance VAT return in the respective country. This procedure can cost the entrepreneur a lot of time, money and resources.
This is where our tax tool comes into play: all threshold are monitored live, notifications are sent our and advance VAT returns for countries where the delivery threshold has already been exceeded are created. In addition, hellotax takes over the correspondence with foreign tax authorities.
The reason for this regulation is that the sales tax is due to the state in which the consumer goods are used. If a German Amazon dealer sells his goods to Belgium, this sale is not taxable in Germany if the delivery threshold has already been exceeded.
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Thus, no sales tax is withheld by the German entrepreneur on this delivery. Each country sets its own delivery threshold. In Belgium this threshold is € 35.000. As soon as the entrepreneur sells goods in Belgium and crosses this threshold, he is obliged to register for tax in Belgium and pay his VAT there. It is therefore very important to always keep these limits in mind.
If now the recipient is the debtor of the tax, it turns many things upside down. However, this procedure simplifies many things for entrepreneurs. Freelancers, for example, can easily work for customers in other countries.
This procedure can save extreme costs for the freelancer. Instead of hiring a separate tax consultant for each country, the recipient of the service must now take care of the payment of the tax.