What is the reverse charge procedure?
The reverse charge procedure is a VAT procedure that is used for cross-border deliveries and services between companies within the EU. Basically, the tax liability is transferred from the service provider to the service recipient. This means that the service recipient must pay the VAT to the tax office instead of the service provider.
In simple terms, this procedure is a special type of VAT in which the customer, rather than the supplier, pays the tax to the tax office. This is usually the case if a service or delivery is provided from abroad and the recipient of the service is based in Germany.
By clicking on the following button, you can download our sample invoice and use it for your clients:
How does the reverse charge procedure work?
The reverse charge procedure applies to cross-border deliveries and services between companies within the EU. It is important to know that only companies that are liable for VAT can use this procedure. So if a company sells or supplies goods or services from abroad, it must issue a model invoice that meets the requirements of the reverse charge procedure.
The sample invoice must contain various details, such as the tax number of the service recipient, the VAT identification number (if there is one!) of the service provider and a reference to the application of the reverse charge procedure. The VAT is then paid to the tax office by the recipient of the service.
When must the reverse charge procedure be used?
This must be applied to cross-border supplies of goods and services between companies within the EU if the supplier is based abroad and the company purchasing the goods or services is liable for VAT. This applies in particular to services such as consultancy services, IT services or construction services.
Advantages and disadvantages of the reverse charge procedure
A major advantage of the reverse charge procedure is that companies do not have to pay VAT to the service provider abroad. Instead, they have to pay the VAT to the tax office themselves. This allows companies, especially smaller companies, to protect their liquidity.
However, one disadvantage of the procedure is that companies have to deal with the complex VAT regulations. The requirements for the model invoice are very specific and must be strictly adhered to in order to pay VAT correctly. Errors in invoicing can lead to additional payments or even fines.
How can correct invoicing from abroad be guaranteed using the reverse charge procedure?
To ensure that a reverse charge invoice is issued correctly, companies should make sure that the sample invoice contains all the necessary information. This information includes:
- The full name and address of the service provider
- The VAT identification number (if available!) of the service provider
- The full name and address of the service recipient
- The VAT identification number of the service recipient
- A unique invoice number
- The date of invoicing
- A description of the goods delivered or services provided
- The net amount of the invoice
- The total amount of the invoice
It is important that all this information is included correctly and completely in the sample invoice to ensure that VAT is paid correctly. In addition, service recipients should ensure that they calculate VAT correctly and know the applicable VAT rate for each invoice.
What effects does the reverse charge procedure have on the recipient’s accounting?
It has an impact on the recipient’s accounting, as they have to pay the VAT themselves. Businesses must ensure that they calculate VAT correctly and record the correct amounts in their accounts. In addition, companies should organize their accounting so that they can keep track of their purchases and sales and ensure that they pay VAT correctly.
Requirements for the reverse charge procedure
In order for the reverse charge procedure to be applied, the following requirements must be met:
- The supplier or service provider must be based abroad, which is the case with a Canadian LLP or a US LLC.
- The recipient of the service must be based in Germany (or in another EU country) and have a valid VAT identification number.
- The service must fall under the reverse charge rule, i.e. it is a supply of goods or services that is taxable in Germany.
- The service may not be provided by a company that is domiciled in Germany or has a permanent establishment there.
Reverse charge procedure – What is the important sentence on the invoice?
If you, as a supplier or service provider, issue an invoice using the reverse charge procedure, you must indicate that the recipient of the service must pay the VAT themselves. Such a note could read, for example:
“VAT is paid by the recipient as the tax debtor in accordance with Section 13b UStG” or “Reverse charge in accordance with Section 13b UStG”.
It is important that this notice is clearly visible on the invoice so that the recipient of the service is informed of his obligations under the procedure.
And what is the “Reverse Charge” text in English?
If you want to issue an invoice using the reverse charge procedure and observe the general reverse charge rules within the EU, you could use the following text:
“The supply of goods/services is subject to the reverse charge mechanism under [Art. 194 of Council Directive 2006/112/EC / the applicable VAT legislation]. The recipient of the goods/services is required to account for VAT on this supply in accordance with the rules applicable in [country where the recipient is established].”
However, it should be noted that the exact text and requirements for invoicing may differ in each EU Member State. It is therefore advisable to find out about the respective national regulations in advance to ensure that the invoice complies with the applicable requirements.
Summary
The reverse charge procedure is a special procedure for VAT processing that is used for certain business relationships between companies within the EU. It means that the VAT for the service provided is not paid by the supplier or service provider, but by the recipient of the service. The reverse charge procedure can be used in various situations, such as the supply of construction services or the provision of services by foreign companies. It is important that when invoicing using the reverse charge procedure, the reference to the VAT liability of the recipient of the service is clearly visible on the invoice in order to inform the recipient of their obligations. Companies involved in cross-border trade should familiarize themselves with the rules of the reverse charge procedure and ensure that they comply with the applicable regulations in order to avoid tax liabilities.
