Generally, VAT is collected from customers by vendors for remittance. Sometimes it is the customer himself who returns the VAT to the tax authorities: this is the 'reverse charge' principle.
The VAT reverse charge mechanism consists of reversing the VAT taxpayer. In principle, VAT is invoiced by the service provider or vendor who collects it and remits it to the State Treasury. The reverse charge moves the responsibility from the vendor, who invoices net of tax, to the buyer of the good or service who will record and return the VAT to the tax authorities.
This mechanism has been set up to regulate the legal framework for VAT in the context of transactions between business sellers and buyers subject to the payment of VAT in the EU.
The reverse charge is a rule in use between all the countries of the European Union but this mechanism also exists for foreign companies located outside the European Union.
The reverse charge mechanism applies only in the context of business to business supplies of goods and services. European companies are concerned by this mechanism if they:
Buy goods to companies located in other EU states and abroad.
Purchase a service from companies located in other EU states and abroad.
Deliver goods for themselves.
Let's take a concrete example: a company based in Germany sells a certain amount of goods and services to a Spanish company. The invoice issued by the German supplier must theoretically mention the Spanish VAT rate at the applicable amount. The reverse charge mechanism for intra-Community VAT allows him to invoice a tax-free amount to his Spanish customer, specifying that the latter will have to pay VAT in his country. It is therefore the Spanish company that will pay its own VAT directly to the Spanish Tax Authorities.
Companies that sell goods or services under the reverse charge mechanism need to get their customer’s VAT number. That number has to be genuine and verified, making sure that the goods or services are purchased for business purposes.
When a company makes a sale of specific goods or services to a customer who is not registered for VAT or is not likely to be registered for VAT in a country of the EU, the reverse charge procedure does not apply. In this case, VAT must be applied in the usual way.
Octobat helps you by verifying the validity of your customer's VAT number in order to automatically apply the reverse charge mechanism and issue the invoices under the EU requirements - including the obligatory mentions on these. Octobat also allows a better follow-up and a simplification of the reverse charge procedures by automatically generating VAT reports and EC Sales List (ESL) for a faster remittance.
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