Introduction
Compliance
VAT-registered businesses must report transactions where the reverse charge applies to avoid compliance issues. If you're dealing with a specific case, it’s advisable to check local VAT legislation or consult a tax professional to ensure compliance. For example, some services, like land-related services or admission to events, distance selling (B2C transactions) and consignments below a certain value follow special rules.
See: Irish Revenue
About EU Reverse Charge
The EU reverse charge mechanism applies mainly to cross-border B2B transactions.
For Purchases: When purchasing goods or services from another EU member state, you must self-account for VAT. This means in the VAT return, calculate and report both the input VAT as if charging yourself VAT (this may be recoverable) and the output VAT as if you are the seller. This ensures VAT is properly accounted for even though the supplier does not charge VAT.
For Sales: Do not charge VAT on the invoice to your customer (provided they are VAT-registered). Instead, you must state on the invoice that the reverse charge applies, so the customer knows they are responsible for accounting for VAT. You still report the sale in your VAT return, but without VAT included.
Domestic Reverse Charge in Specific Industries
Some countries have extended domestic reverse charge mechanisms to certain industries to combat VAT fraud. In these cases, the purchaser must account for VAT at the rate applicable in their country (standard, reduced, or zero rate).
For example:
- Construction Industry
- Energy and emissions trading
- Electronics
- Scrap metal and precious metals
Designating a Tax Code as EU Trade and Reverse Charge
Go to Setup > Codes Maintenance > Tax Codes and follow the instruction in Using Codes Maintenance to add or edit a tax code. Ensure all details are set correctly:
- Check EU Trade.
- Check Reverse Charges and enter the Reverse Charge Rate.
Impact on the VAT Return
The following boxes are affected on the VAT Return:
| Transaction Types | VAT | Total of Goods or Services |
|---|---|---|
| Sales of Goods to the EU | N/A | E1 |
| Sales of Services to the EU | N/A | ES1 |
| Sales of Goods to ROW inc GB | N/A | N/A |
| Sales of Services to ROW inc GB | N/A | N/A |
| Purchase of Goods from the EU | T1 & T2 | E2 |
| Purchase of Services from the EU | T1 & T3 | ES2 |
| Purchase of Goods from ROW inc GB | T1 & T4 | PA1 |
| Purchase of Services from ROW inc GB | T1 & T5 | N/A |
See:
Purchases on the VAT Return [T1] [T2]
The Purchase Transaction
Below is a Purchase Invoice of €200 that we are going to add to a VAT Return. It uses the V05 VAT Code with a rate of 0% resulting in 0 VAT charged:
The VAT Code in question is for Services and EU Trade and has a Reverse Charge rate of 21%.
The VAT Return
The system calculates the VAT due on EU Purchases at the rate set in the Reverse Charge Rate. In this case, 21% of €200 is €42. This is added to the total in VAT on Vat on Purchases & Other Inputs [T2] of the Irish VAT Return. Then the same value is added to VAT on EU Purchases [T1].
The VAT Summary Report:
Net Payable and Repayable on the VAT Return [T3] [T4]
The total VAT Payable or Repayable is calculated and shown in boxes T3 and T4. In this example, where there is only a Reverse Charge Invoice, the net VAT will be zero as the value of sales is the same as purchases for Reverse Charges.
The VAT Summary Report:
Total Services and Total Goods on the VAT Return [ES2] [E2]
- The gross amount of any Purchase Invoices coded to the Reverse Charge VAT Code Goods is entered into Total Goods from other EU countries [E2]. In this case, it is 0 as we our transaction dealt with services.
- The gross amount of any Purchase Invoices carrying the Reverse Charge VAT Code Service is entered into Total Services from other EU countries [ES2]. In this case, it is €200.
The VAT Summary Report:
