Reverse-charge VAT: when does it apply?

What is reverse-charge VAT?

Shifted VAT means that the obligation to charge and remit VAT shifts from the supplier to the customer. In that case, you send an invoice without VAT and clearly state that the VAT is reverse-charged. The customer then calculates the VAT himself and reports this in his own VAT return.

The reverse charge mechanism is a charging mechanism applied in sectors or situations where it is more practical or necessary for the customer, rather than the supplier, to pay the VAT. For you as a supplier, it is therefore especially important to know exactly when this scheme applies and how to prepare the invoice correctly.

When should you reverse charge VAT?

Reverse charge only applies in designated situations and under the associated conditions. This list is a starting point: assess the service, customer and location per transaction. Not every foreign invoice, construction contract or delivery of electronics falls under it:

• doing business with foreign countries
• subcontracting and staffing in the construction, shipbuilding, cleaning and landscaping sectors
• waste and old materials
• mobile phones, chips, game consoles, laptops and tablets
• immovable assets
• foreclosure sales
• supply of gas and electricity certificates
• sale of gold
• transfer of allowances
• telecommunications services

In telecommunications, it concerns designated services between businesses that provide these services, not every telephone subscription. For designated electronics within the Netherlands, a threshold of €10,000 or more excluding VAT per type of goods per delivery applies; partial invoices from the same order also require attention. You can read more about this at when to reverse charge VAT.

How does VAT reverse charge work?

If you reverse charge VAT, you invoice without VAT. You state clearly on the invoice that the VAT is reverse-charged and put your customer's VAT number on it. In addition, you state the amount excluding VAT and indicate which VAT rate would normally apply, so the customer knows how much VAT he must calculate in his tax return.

The buyer calculates the VAT himself based on your invoice. He enters this amount in his tax return and pays the VAT directly to the tax authorities. If the customer himself has normal taxed turnover, he can usually also deduct this reverse charge VAT as input tax in the same return. As a result, he pays nothing extra on balance.

Indications on the invoice

In any case, the invoice must state:

• The text VAT reverse charge
• The amount excluding VAT
• The consideration broken down by the VAT rate that would apply without the reverse charge
• The customer's VAT identification number

Always check whether your customer is a businessman and has a valid VAT number. If it later turns out that the VAT number is incorrect, the tax authorities may still hold you liable for VAT. You can check the VAT number via the VIES check.

Filing VAT returns

Applying the reverse charge mechanism means that both you and the customer have to account for something in the VAT return.

VAT has been reverse-charged to you

With domestic reverse charge, you state both the remuneration and the calculated VAT in box 2a. For supplies from abroad, you use the applicable box 4a or 4b. Only the deductible part of that VAT goes in 5b. Reverse charge does not in itself give a right to deduction.

You have reverse-charged VAT to your customer

For domestic reverse charge, you report the consideration in 1e. For a standard reverse-charged B2B service to a business customer in another EU country, you use 3b and, if conditions require, the ICP return. For other foreign supplies, other sections may apply. Check the official explanation regarding invoice and tax return.

Example of domestic reverse charge: a subcontractor carries out work on a commercial building for €2,000 for which the reverse charge applies and the standard rate is 21%. The invoice states €2,000 to be paid, “VAT reverse charged”, both VAT IDs and the other invoice details. The supplier reports €2,000 in 1e. The customer enters €2,000 and €420 in 2a; only with full deduction entitlement also €420 in 5b.

Deducting reverse charge VAT

You process the deductible VAT on goods or services for which VAT has been reverse-charged to you as input VAT, but this is only possible if you use them for taxed business activities. If you use them partly for exempt turnover, you may not deduct all VAT. If you, as a supplier, have incurred costs for an order for which you have reverse-charged VAT, you may simply reclaim that VAT paid on your costs.

Advantages and disadvantages

The reverse charge mechanism has advantages and disadvantages that you need to be aware of as an entrepreneur.

Advantages:

• As a supplier, you do not have to pay VAT on the turnover on which you reverse VAT
• The buyer does not have to pre-finance the VAT and processes it directly in its tax return
• It prevents fraud in sectors where it is more common
• Reverse charge shifts who accounts for VAT; you remain responsible for correct application

Disadvantages:

• Administration is more complex and the risk of errors is higher
• An error in the invoice could mean you still have to pay VAT
• Customer may not deduct incorrectly calculated VAT

VAT reverse charge not properly applied

You must always apply the reverse charge mechanism correctly. If you don't, it can result in retrospective assessments, incorrect returns and problems with VAT deductions. What can go wrong depends on your role in the transaction.

As a supplier

Did you incorrectly charge VAT when you should have reverse-charged VAT? Then you still have to pay that VAT to the tax authorities. The invoice must be corrected and you run the risk of an additional tax assessment.

As a buyer

Did you receive an invoice charging VAT when the supplier should have applied the reverse charge? You cannot deduct that VAT. Ask for a corrected invoice without VAT charged and with the words “VAT reverse charged”.

VAT reverse charge mechanism and the KOR

If you are a KOR participant and VAT is correctly reverse-charged to you, you must declare it and cannot deduct it. For your own supplies, first assess whether the KOR exemption applies. Do not automatically write “VAT reverse charged” on every invoice without VAT: a VAT exemption is something else. Check foreign transactions separately.

Frequently Asked Questions