Reverse charge - What is the reverse charge?
The reverse charge refers to intra-community transactions when the VAT is recorded by the buyer instead of the seller.
Learn how to create a reverse charge invoice with SumUp Invoices.
The reverse charge applies to transactions that occur between VAT registered businesses in two different countries within the EU. In typical transactions within a country, it’s the responsibility of the seller to record the VAT on their sales. The reverse charge transfers this responsibility to the buyer.
Why is the reverse charge used?
The reverse charge was introduced in the EU to simplify the processing of transactions across borders.
In using the reverse charge, the buyer records both the supplier’s output VAT and their own input VAT amounts. These effectively cancel each other out and can be viewed by the authorities, however, they don’t have as high an impact on the transaction as would occur if the seller were to undertake the recording of VAT.
When does reverse charge apply for UK businesses after Brexit?
The reverse charge applies primarily in business-to-business (B2B) transactions. After the UK left the EU in 2021, there were some changes to the reverse charge procedure for UK-based businesses.
As of 2021, Great Britain (England, Scotland and Wales) left the EU single market and VAT area, whereas Northern Ireland remained. Therefore, there are different rules for Great Britain and Northern Ireland.
If your business is based in Great Britain and you’re selling to an EU business, the reverse charge will not apply in the majority of cases. If you’re selling to a business based in Northern Ireland, you’ll use the domestic VAT procedure.
If your business is based in Northern Ireland and you’re selling to an EU business, the reverse charge will still apply after Brexit in most cases. If you’re selling to a business in Great Britain, you’ll use the domestic VAT procedure.
There are several exceptions, including cross border sales of services. You should speak to a qualified accountant to determine if you should apply the reverse charge.
How does reverse charge work?
The reverse charge allows the purchase to be handled as though the buyer is also their own supplier. Although this isn’t the actual case, for the purposes of tax, this allows the seller to more easily process the transaction.
As long as the buyer is VAT registered and is entitled to all VAT regulations and benefits (isn’t partially blocked or exempt, for example), then the seller’s VAT combined with the buyer’s VAT will cause the total to be neutral on their VAT Return.
This process allows tax authorities on both sides to see that the regulations were followed concerning cross-border transactions.
Reverse charge and invoicing software
If your business is permitted to apply the reverse charge on your sales, this will need to be reflected on your invoices.
With invoicing software like SumUp Invoices, as soon as you indicate that a transaction is occurring with a buyer or supplier across EU borders, you will have the option to apply the reverse charge.