VAT Reverse Charge in Ireland
In a Value-Added Tax (VAT) system, the VAT-registered supplier generally adds VAT to their goods or services, collects it from the customer, and then forwards it to the tax authorities. With reverse charge, this responsibility shifts from the supplier to the customer. Under the reverse charge system, the supplier issues an invoice without VAT but includes a mandatory reference to the reverse charge.
Moreover, the buyer is responsible for calculating and remitting the VAT to the appropriate tax authorities. If the buyer has the right to deduct VAT, they may be able to claim it back as input. Simply put, with VAT reverse charge, the buyers pay the VAT instead of the seller.
VAT reverse charge reduces or eliminates the need for sellers to register for VAT in the country where the supply occurs. If the supplier pays local VAT on costs related to the reverse charge service or goods, they can recover it through an EU VAT reclaim.
The VAT reverse charge mechanism was introduced with the EU VAT system reform for the creation of the single market in 1993. This simplified VAT reporting responsibilities for VAT-registred businesses in the EU.
Where the Reverse Charge is Used?
The reverse charge mechanism is used when the supplier is located outside the country where VAT is due. It’s required within the EU for specific cross-border supplies of goods or services. Furthermore, it also applies to services provided to EU VAT-registered businesses in a different EU member state and has been mandatory since 2010.
For certain services, such as those related to immovable property and live events, VAT is applied based on the place of supply rules, which is where the service occurs. Additionally, domestic reverse charges apply to certain services provided between VAT-registered businesses. Specified products or services refer to building and construction services covered by Construction Industry Schemes (CIS).
How Does the Reverse Charge Operate?
When the reverse charge is applied, the customer — who receives the goods or services — gets an invoice with no VAT. When the customer completes their VAT return, they calculate the VAT amount and report it as both due and deductible. From a cash payment perspective, the two entries cancel each other out in the same return.
Tax authorities can view the transaction in the designated boxes on the returns for cross-border supplies of goods or services. Let me give you an example.
Example:
If Company A sends an invoice with a reverse charge to Company B for €100, Company B will pay €100 to Company A without any VAT added. When Company B does its VAT return, it calculates VAT on the €100. In Ireland, with a 23% VAT rate, this would be €23.
Company B reports this €23 as both output VAT (sales) and input VAT (purchases) on the same VAT return. Because the €23 is added and then subtracted, Company B does not actually pay any VAT to the tax authorities for this invoice.
Concluding Statement
In conclusion, reverse charge VAT helps manage VAT compliance in international trade and certain domestic situations. Carefully go through the guide to get a clear idea of what the reverse charge VAT mechanism is.