What should you know about it?
Issuing invoices without VAT to a business customer not being aware of the need to charge VAT can raise serious risks. The same applies to recovering VAT on invoices where no VAT should have been charged.
The basic rule is that a supplier must charge VAT on supplies of goods and services. In B2B situations, the VAT is sometimes due by the customer: the levy of VAT is then shifted to the customer. Incorrect application of the reverse charge mechanism can cause serious VAT risks for both the supplier as well as its customer. In this article, we will give guidance to avoid these risks.
Why a risk?
If the VAT is regularly charged by a supplier to its business-customer, the supplier must report and pay the VAT as due and the customer can recover the VAT in its VAT return – taking into account that the customer uses the goods for purposes he can fully recover the VAT. In case the supplier charged VAT but should have applied the reverse charge mechanism, the risk is at the side of the customer. VAT that is incorrectly charged on an invoice is not recoverable. So if the customer accepts the invoice and recovers the VAT, this may lead to VAT assessments.
In case the suppier applied the reverse charge mechanism but should have charged VAT, the risk is at the side of the supplier. The VAT due can be assessed.
So even in case there is no (risk of) loss in taxes for the tax authorities and at first sight everything seems fine, there can be a serious risk for VAT assessments.
When to apply the reverse charge mechanism
There are quite some situations where the reverse charge mechanism may be applicable. The headlines in the Netherlands:
- Supplies of services under the main rule for B2B services where supplier and customer are established in different countries;
- Construction work in situations of sub-contracting;
- Domestic supplies of goods or not main-rule services by a non-established supplier to an established company or legal entity;
- Supply of goods by the ‘middleman’ using simplified triangulation;
- Supplies of waste material and (most) used metals;
- Supplies of immovable property using an option for VAT.
Please be aware that only the reverse charge for main-rule B2B services applies within the EU in the same way. Other reverse charge rules may differ (or not apply at all) in other EU countries. For domestic supplies by non-established companies, the rules may vary from EU country to EU country. This may even lead to unexpected VAT registration obligations in other EU countries.
Further, most of the above rules have exceptions and requirements. Please take care to be well-informed about the rules that apply in your business: both as a supplier as well a customer.
Examples and Court cases
In our practice and also in national and EU court cases, we regularly see situations where the rules are not applied correctly and issues arise.
A few examples:
- A Dutch company has a German VAT number for supplies of goods from German stock. The German VAT number is provided to German suppliers of goods and services. German logistics companies charge German VAT for the transport and storage of goods. The German VAT on these services cannot be recovered as it should have been reverse-charged to the Dutch VAT number;
- A Dutch BV is managed from the UK and does not have actual presence in the Netherlands. Dutch suppliers of services charge Dutch VAT. The recovery of the Dutch VAT can be rejected as the BV is considered a non-established company due to its UK management;
- In a chain transaction, goods are sent directly from a supplier in Germany to a business customer in Belgium. A Dutch company is the middle man in this transaction. No VAT is charged on the invoice, but no reference is made to the reverse charge mechanism. Following EC Case Law, this means that simplified triangulation can only be applied if a number of requirements are met, including reference to the reverse charge mechanism on the invoice. As a consequence, the Dutch company must register for VAT in Belgium to report the purchase from Germany and the supply to the Belgian customer. Further, a ‘number acquisition’ should be reported in the Netherlands. The VAT on this acquisition is not recoverable.
Conclusion
It is important to be well-informed about the rules that apply regarding the reverse charge mechanism in VAT. This does not only apply to sales invoices you issue your own, but also to purchase invoices where VAT is charged. Being well informed may save you from a serious loss of VAT.
