Normally the supplier charges VAT, collects it and pays it to the tax authority. Under the reverse charge, the supplier issues the invoice without VAT and the customer accounts for both the output and the input tax in their own return. For a fully taxable customer the two entries usually cancel out, so no money moves — but the transaction is still reported.
It applies most commonly to cross-border business-to-business supplies of services within the EU, and to certain domestic sectors where authorities have applied it to combat fraud, such as construction and some electronics trading.
Why It Matters
The reverse charge is one of the most common reasons a cross-border invoice gets rejected. Where it applies, the invoice must state it explicitly — the words "reverse charge" or an equivalent reference — and must carry the customer’s VAT identification number. Get either wrong and the customer’s finance team will send it back, because their ability to handle the tax correctly depends on both. Charging VAT where the reverse charge should have applied is the other half of the problem: the customer cannot reclaim it, and unpicking it means credit notes.
Example
A designer in Ireland invoices a company in Germany for €5,000 of services. Because the customer is a VAT-registered business in another member state, the invoice shows €5,000 with no VAT, states "Reverse charge", and shows the German customer’s VAT number. The customer accounts for German VAT on the €5,000 in their own return.
Frequently Asked Questions
Do I need my customer’s VAT number to apply the reverse charge?
Yes, and you should verify it rather than simply record what you were given. The EU operates a public validation service for exactly this. An unverified or invalid number can leave you liable for tax you did not charge.
Does the reverse charge apply to consumers?
No. It is a business-to-business mechanism. Supplies to private consumers follow the ordinary rules, which for cross-border digital services often means charging VAT at the consumer’s local rate.