Reverse charge is the reversal of the tax liability between the supplier and the recipient. It must be noted accordingly on the invoices affected by it. To make sure you don’t make any mistakes when preparing your invoice, we will list the important features of a reverse charge invoice and explain them in detail below.
Antonia KlattLast Updated on 3 July 2023
What is Reverse Charge?
Normally you pay VAT if you are the service provider. But not for foreign sales – in this case the recipient pays it, if your sales have not reached the respective delivery threshold in the country. This saves you the bureaucracy with foreign authorities and at the same time reduces tax fraud.
Reverse charge means the reverse of the tax liability between supplier and recipient. In short, the supplier issues an invoice that does not include any tax rates and notices that it is a reverse charge invoice and he is not, like it would usually be the case, liable to pay VAT but the recipient is.
NOTE: Only B2B transactions/sales can be subject to Reverse Charge as both parties do need to have a VAT identification number. Reverse Charge can not apply to B2C transactions/sales.
More articles about Reverse-Charge
Examples for the Reverse Charge Method
Let’s take a look at an example of the reverse charge procedure. Suppose a craftsman based in Switzerland builds an individual kitchen for the office of a customer in Germany. The craftsman carries out his work in Germany with the corresponding entrepreneur.
Now it is not the craftsman from Switzerland who owes his tax office the VAT, but the entrepreneur resident in Germany. For this the craftsman issues an invoice, which contains an appropriate reference to the reversal of the tax debt.
Reverse Charge Invoice: Structure
In order for the invoice to comply with the law, it is necessary to indicate the mandatory information on the invoice. If these are missing, the tax office could reject the corresponding invoice and possibly impose penalties.
- Address of the service provider
- VAT identification number of the service provider / tax number
- Information about the recipient of the service
- Date of issue of the invoice
- VAT identification number of the service recipient / tax number
- Consecutive invoice number
- Credit point (service date)
- Description of the service rendered (net amount, no tax rate or 0% indication)
- Reference to reverse charge procedure, for example: “*Invoice without VAT because there is a reverse of the tax liability (reverse charge)”, or you look for the appropriate paragraph of the reverse charge method in the country from which you are selling
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When issuing a VAT Reverse Charge Invoice, you must not forget the required information on it and you absolutely need the addition that it is an invoice with reversed VAT liability. Otherwise, you can be hold accountable for the VAT payment.
The reverse-charge procedure helps companies cut down on bureaucracy and reduces tax fraud in Europe through reverse VAT liability. The VAT is not paid by the service provider, but by the foreign recipient of the service. This service is then not taxable for the domestic company and no VAT is shown on the reverse charge invoice.
The invoice must contain the VAT identification numbers of both parties and the indication that it is a reverse charge invoice. In addition, you must have the VAT identification number checked before you act. If you have all the important details, you can now create your reverse charge invoice. You can find sample invoices online.