The VAT reverse charge mechanism is a necessary procedure used in the tax system that applies to specific business transactions. Although this regulation was withdrawn in 2021 as part of a change in the law, it is worth learning about it, as it was commonly used and may appear, for example, in older transactions or invoices. What exactly was the reverse charge of VAT, when should it have been applied, and how can an invoice with this mechanism be booked?
Reverse charge - what is it?
Reverse charge VAT (reverse charge) is a special mechanism for accounting for value-added tax (VAT) that involves shifting the obligation to account for VAT to the buyer of goods or services instead of the supplier. In the standard model, the seller adds VAT to the sales price and then remits it to the tax office. In the reverse charge mechanism, the responsibility for charging and remitting VAT rests with the buyer.
It is worth noting that the reverse charge was applied only in certain situations, mainly for transactions related to the turnover of selected goods and services, especially in the construction, electronics, or metal industries.
When should the reverse VAT charge be applied?
When considering when the reverse charge is applied, it is important to note several essential conditions. The mechanism applied only to certain goods and services, as specified in the relevant legislation (in Poland, these were Annexes 11 and 14 to the VAT Act). Reverse charge covered, among others:
- Construction services - This mechanism was commonly used in this industry, especially when one construction company provided services to another company.
- Trading in electronics - in the case of sales of cell phones, laptops, tablets, and game consoles.
- Trading in metals - This mechanism covered transactions related to trading in copper, steel, aluminum, and other non-ferrous metals.
The reverse charge was applied when both parties to the transaction were active VAT taxpayers (both the seller and the buyer). It is worth noting that as of 2021, the split payment mechanism has replaced the reverse charge mechanism, but it can still be relevant for older transactions.
How do you book a reverse charge invoice?
From an accounting point of view, a reverse charge invoice requires proper recognition in the tax records. It was essential to correctly recognize the buyer’s obligation to charge and pay VAT rather than the supplier’s, which differed from standard procedures.
Step by step – how to book a reverse charge invoice:
- receipt of the invoice - The seller issued an invoice without input VAT, indicating on the document that the transaction is subject to the reverse charge mechanism. The invoice contained the notation “reverse charge” or “reverse charge.”
- buyer's records - the buyer was required to account for VAT on the transaction. This meant he had to simultaneously charge output VAT and deduct input VAT (if he was entitled to it).
- VAT return - The buyer reported both output VAT and input VAT in his VAT-7 or VAT-7K return.
Thus, if the purchaser had the right to deduct, the mechanism was financially neutral since the input tax amount equaled the output tax.
Reverse charge VAT – examples
Reverse charge VAT – examples
It is worth looking at some practical examples to understand better how the reverse charge works.
Example 1: construction services
Company A provides construction services to Company B. Both companies are active VAT taxpayers. According to the regulations, company A issues an invoice without VAT, with the notation “reverse charge.” Company B, being the purchaser of the service, is required to account for the VAT. Assuming that the VAT rate is 23%, Company B reports output VAT of 23% of the value of the service in its VAT return and, simultaneously, has the right to deduct it (if it meets the conditions for deduction).
Example 2: sale of electronics
Company X sells cell phones worth PLN 50,000 to company Y. Both companies are VAT taxpayers. Company X issued an invoice without VAT because cell phone sales were subject to the reverse charge mechanism. Company Y must charge VAT in its tax return – 23% on PLN 50,000 (PLN 11,500 VAT due) and deduct the same amount simultaneously.
Reverse charge - tax obligation
A vital mechanism element was when tax liability arose for reverse charges. Tax liability arose on the same basis as for standard VAT transactions. This meant that VAT due had to be shown at the time of delivery of the goods or performance of the service or when the invoice was issued, if earlier.
It should be remembered that even though the seller did not charge VAT, he was still obliged to show the transaction correctly in his sales records.
The buyer, on the other hand, was obliged to account for the tax and recognized the VAT in its return for the period in which the tax liability arose. This meant that the parties to the transaction had to work together carefully to ensure compliance.
