The Reverse charge procedure refers to a special VAT scheme where it is not the supplier of the services, but the recipient of the services who owes the VAT. In German VAT law, this is referred to as the reverse charge mechanism and is governed in particular by § 13b of the German VAT Act (UStG).
What does reverse charge mean?
As a rule, the entrepreneur who carries out a taxable delivery or other service owes the VAT. In the cases specified by law under the reverse-charge procedure, however, the tax liability is assigned to the recipient of the service.
The recipient of the service must therefore account for the VAT owed on the transaction as part of their VAT obligations.
When does reverse charge mechanism apply?
The reverse charge mechanism applies only to transactions specified by law. Under certain conditions, use cases pursuant to Section 13b of the German Value Added Tax Act (UStG) include, for example:
- certain supplies of services subject to domestic tax by foreign entrepreneurs
- certain construction services
- certain property transactions
- further supplies and services explicitly specified in the Umsatzsteuer Act
Whether the tax liability actually transfers to the recipient of the services depends on the specific transaction and the statutory requirements applicable to it.
What is the significance of the reverse charge mechanism for the invoice?
Special VAT invoicing requirements apply to reverse-charge transactions. In the cases provided for by law, a reference to the customer's liability for VAT must be included.
For supplies under Section 13b(2) of the German Value Added Tax Act (UStG), for which the recipient of the supply owes the tax, Section 14a UStG requires the statement „reverse charge“ (or: "tax liability of the recipient of the supply").
Reverse charge and Input VAT
The VAT payable by the recipient of the supply under section 13b of the German Value Added Tax Act (UStG) may, subject to the statutory conditions, also be deductible as Input VAT if the supply was made for the purposes of the recipient’s business and the other conditions for the Input VAT deduction are met.
Tax liability and Vorsteuer deduction are assessed separately in law. Therefore, a Vorsteuer deduction does not automatically apply in every reverse-charge case.
Connection with advance VAT return
reverse-charge supplies are reported in the designated areas of the VAT Return taken into account.
In Bookkeeping, the respective business transaction must be recorded according to its VAT treatment. The appropriate Account assignment depends on the specific facts and the Chart of accounts used.
