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Reverse Charge VAT
A VAT accounting mechanism where the buyer — not the seller — accounts for VAT on a cross-border B2B supply. The seller invoices at zero-rate; the buyer self-assesses VAT in their own country. EU law requires VAT number validation before applying it.
Reverse charge is a VAT accounting mechanism that shifts the tax collection obligation from the seller to the buyer on cross-border B2B transactions. Instead of the seller charging VAT and remitting it to their tax authority, the buyer accounts for the VAT in their own country — both 'paying' and claiming it back in the same VAT return, typically resulting in zero net cost. For the seller, it means issuing a zero-rate invoice with a 'reverse charge' notation.
When reverse charge applies
Reverse charge applies to cross-border B2B supplies of goods and services within the EU when all three conditions are met: (1) both supplier and customer are registered for VAT, (2) the supply crosses an EU member state border, and (3) the customer provides a valid VAT number from a different EU member state. For digital services specifically, reverse charge applies regardless of the customer's country if they have a valid EU VAT number.
How it works in practice for SaaS billing
- 1.Customer claims to be an EU business and provides their VAT number at checkout
- 2.You validate the VAT number against VIES before applying zero-rate — this is a legal requirement, not optional
- 3.VIES confirms the number is valid and active
- 4.You issue an invoice at 0% VAT with the notation 'VAT reverse charged' and both VAT numbers (yours and the customer's)
- 5.Customer self-assesses VAT in their country by adding it to their VAT return as both input and output tax — net effect is usually zero
- 6.You do not collect or remit VAT for this transaction
Warning
If you apply reverse charge to a transaction and the VAT number turns out to be invalid or the business was not actually registered at the time of the sale, you — the seller — are liable for the full VAT amount on that transaction. You cannot recover it from the customer. This is why validation must happen before applying zero-rate.
Invoice requirements under reverse charge
- →Your VAT registration number
- →Customer's VAT registration number (validated)
- →The notation 'Reverse charge' or 'Reverse charge — Article 196 EU VAT Directive'
- →Net amount (no VAT added)
- →0% VAT rate explicitly stated
- →Date of supply
Reverse charge vs zero-rated vs exempt
These three terms are often confused. Zero-rated means VAT applies at 0% — the transaction is taxable but at a zero rate, and input VAT recovery is allowed. Exempt means VAT does not apply and input VAT cannot be recovered. Reverse charge is a collection mechanism applied on top of the standard VAT treatment — the underlying transaction is typically standard-rated in the customer's country, but the collection obligation moves to them.
Frequently asked questions
What is EU reverse charge VAT?
Reverse charge is a mechanism where the buyer accounts for VAT on a cross-border B2B supply instead of the seller. The seller invoices at zero-rate with a 'reverse charge' annotation. The buyer adds the applicable VAT to their own VAT return as both input and output tax, typically netting to zero. It prevents sellers from having to register for VAT in every EU country where they have business customers.
Does reverse charge apply to all EU B2B transactions?
No — reverse charge requires the supply to cross an EU member state border. If you and your customer are both registered in the same country, normal domestic VAT rules apply. Reverse charge specifically covers intra-community B2B supplies where supplier and customer are in different EU member states.
What goes on a reverse charge invoice?
A reverse charge invoice must include: your VAT number, the customer's VAT number, the notation 'Reverse charge' (or a reference to Article 196 of the EU VAT Directive), the net price, 0% VAT rate, and the date of supply. Some countries require additional fields — check the specific requirements of your country of establishment.
What if the customer's VAT number is invalid?
If you cannot confirm a valid VAT number, you must charge VAT at your country's standard rate. If you apply reverse charge on an invalid number and are later audited, you are liable for the VAT. Some businesses maintain a 'last known valid' cache for existing customers and allow transactions with a short validation grace period — but new customers should always be validated before first zero-rate invoice.
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Related resources
Related terms
VIES (VAT Information Exchange System)
The EU Commission's official real-time system for validating VAT numbers across all 27 member states. It queries national tax databases and returns the registration status, company name, and address of any EU-registered business.
EU VAT Number
A unique identifier issued by a national EU tax authority to businesses registered for value added tax. It enables zero-rate treatment on cross-border B2B transactions and is the basis for all EU VAT compliance.
B2B VAT Exemption
Zero-rate treatment applied to cross-border EU B2B supplies where the buyer holds a valid VAT number in a different member state. Not a true exemption — the transaction is still VAT-applicable; the buyer self-accounts via the reverse charge mechanism.
EU OSS Registration
The EU One Stop Shop (OSS) scheme, introduced July 2021, allows businesses selling digital services to EU consumers (B2C) to register for VAT in one EU country and remit VAT for all EU consumer sales through a single return — eliminating the need for separate VAT registrations in each member state.