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EU optional reverse charge extended until Dec 2026

As the Definitive VAT System reforms go on hold, the EU has extend the option to use reverse charge to reduce compliance obligations and fight fraud

EU Finance Minister agreed this month to extend the optional reverse charge until 31 December 2026. This is partially been done as the Definitive VAT System reforms have failed to progress and now look stalled.

The reverse charge shifts liability for VAT payment from the seller to the customer. It targets missing trader or carousel fraud, estimated to cost EU member states up to €50 billion. This type of fraud occurs when a trader acquires goods, transported or dispatched from another Member State, and exempt from VAT, and sells them on including VAT on the invoice to the customer. After having received the VAT amount from the customer, the trader disappears before paying the VAT due to the tax authorities.

The extension will also apply to the Quick Reaction Mechanism (QRM) to combat VAT fraud. The QRM allows Member States to quickly introduce a temporary reverse charge mechanism for the supply of goods and services in particular sectors if sudden, massive fraud occurs.

Countries shift VAT reporting from suppliers to customers to reduce VAT fraud – General & Domestic Reverse Charge by country

In attempt to reduce the VAT Gap – the shortfall of VAT revenues compared to expected receipts – EU and other states apply the Reverse Charge mechanism in a number of transactions. This means instead of suppliers collecting the VAT element cash from their customers and then being responsible to pay the VAT to the appropriate tax authorities, the customers pay only the net transaction amount to the supplier and account for the VAT on their own VAT return. This takes the VAT cash element – and therefore the fraud opportunity – out of the equation.

The common situations where the reverse charge is used to combat VAT fraud on B2B transactions are below. For B2B cross border services, transactions in most countries around the world use the reverse charge (article 44 of the EU VAT Directive):

  1. General Reverse Charge:  Non-resident companies selling goods domestically to other businesses, where countries elect the may provision of Article 194 of the EU VAT Directive, or similar rules outside of the EU (see list below); and
  2. Domestic Reverse Charge: resident and non-resident companies selling fraud-sensitive goods where the country has elected under Article 199 of the EU VAT Directive (see below).

EU VAT General and Domestic Reverse Charge rule by country

Country General RC (art 194) Domestic Reverse Charge (art 199)
Domestic goods * Immoveable Property Installation Construction Scrap metal Mobile Phones Gas & electrcity Carbon Trading
Austria Yes Yes Yes Yes Yes Yes Yes Yes
Belgium Yes Yes Yes Yes - - Yes Yes
Bulgaria - - Yes - Yes - Yes -
Croatia Yes Yes Yes Yes Yes - Yes Yes
Cyprus - - Yes Yes Yes Yes Yes -
Czech Republic Yes - Yes Yes Yes Yes Yes Yes
Denmark - - Yes - Yes Yes Yes Yes
Estonia Yes Yes Yes - Yes - Yes -
Finland Yes - Yes Yes Yes - Yes Yes
France Yes - Yes Yes Yes - Yes Yes
Germany - Yes Yes Yes Yes Yes Yes Yes
Greece Yes - - - Yes Yes Yes Yes
Hungary  - Yes Yes Yes Yes - Yes Yes
Ireland - Yes Yes Yes Yes - Yes Yes
Italy Yes Yes Yes Yes Yes Yes Yes Yes
Latvia - - Yes Yes Yes Yes Yes -
Lithuania Yes - Yes Yes Yes - Yes -
Luxembourg - - - - - - Yes Yes
Malta Yes - Yes Yes - - Yes -
Netherlands Yes Yes Yes Yes Yes Yes Yes Yes
Poland Yes - Yes Yes - - Yes -
Portugal Yes Yes Yes Yes Yes - Yes Yes
Romania Yes Yes Yes - Yes Yes Yes Yes
Slovakia Yes Yes Yes Yes Yes Yes Yes Yes
Slovenia Yes Yes Yes Yes Yes - Yes Yes
Spain Yes Yes Yes Yes Yes Yes Yes Yes
Sweden  Yes - Yes Yes Yes Yes Yes Yes
Non-EU
Norway - - - - - - - -
Switzerland Yes - Yes - - - Yes -
UK - - Yes - - Yes Yes Yes
* Further local rules on the VAT status of the supplier and their customer need to be considered to determine if RC applies

Death of the VAT Return – reverse charge part of global trend

The use of the reverse charge is part of the wider shift towards the death of the VAT return, including pre-filled VAT returns and e-invoicing. VAT Calc’s in real-time global Calculator and Auditor  services produce instant and accurate tax calculations including the Reverse Charge in all scenarios into your ERP, billing, e-commerce or e-invoicing systems.

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