🔄 What is the Reverse Charge Mechanism?

The Reverse Charge Mechanism is a VAT system within the European Union (EU) designed to simplify taxation for intra-community B2B transactions. It shifts the responsibility for VAT reporting from the seller to the buyer, reducing administrative burdens for cross-border trade.

📌 Key Facts:

• Introduced in 1993 as part of the EU VAT reform
• Aims to streamline VAT compliance within the EU single market
• Applies only to B2B transactions where both parties are VAT-registered

🛠️ How Does It Work?

🔹 For the Seller:
✅ Issues an invoice without VAT
✅ Includes a note stating that the reverse charge applies
✅ Mentions the buyer’s VAT Identification Number (VAT ID)

🔹 For the Buyer:
✅ Reports both input VAT and output VAT in their VAT return
✅ Typically, the VAT impact is neutral if they can deduct input VAT

⚠️ Note: This mechanism applies only to B2B transactions—both businesses must have a valid VAT ID. It does not apply to B2C transactions.

📌 Example

A German VAT-registered business purchases goods from an Italian supplier:

1️⃣ The Italian supplier issues an invoice without VAT, adding a reverse charge note.
2️⃣ The German buyer reports the transaction to the German Tax Authorities, declaring both input VAT and output VAT in their VAT return.

📄 Invoice Requirements

To ensure compliance, an invoice under the reverse charge mechanism must include:

🔹 Seller Information:

• Business name & address
• VAT ID

🔹 Buyer Information:

• Business name & address
• VAT ID

🔹 Invoice Details:

• Invoice date & number
• Service date (credit point)
• Description of goods/services (with net price, no VAT rate)
• Reverse charge reference, e.g.:
  • “Invoice without VAT under the reverse charge mechanism”
  • OR a reference to the relevant VAT legislation

📌 Example invoice attached below!

📚 Learn More

For further details, including country-specific rules and examples, visit our blog.