Reverse Charge Procedure
The reverse charge procedure is a shift of the tax liability: not the supplying business but the recipient owes and reports the VAT. The issuer shows no tax on the invoice; the recipient calculates it themselves and — if entitled to input VAT deduction — deducts it again in the same step.
The reverse charge procedure denotes the shift of the tax liability for VAT. Unlike the standard case, in which the supplying business shows the VAT on its invoice, collects it and pays it to the tax office, this obligation passes to the recipient of the supply. The invoice issuer bills the service net without VAT; the recipient calculates the tax owed themselves, reports it in their advance VAT return and — provided they are entitled to input VAT deduction — can reclaim it as input VAT in the same operation.
Legally, the procedure in Germany is based on § 13b UStG, which implements the European VAT System Directive. Its aim is, on the one hand, to simplify cross-border supplies and, on the other, to combat VAT fraud: because the supplying business collects no tax, it also cannot retain it and disappear (carousel fraud). In many cases the posting is economically neutral for the recipient, because the tax to be reported and the deductible input VAT are of equal amount and cancel each other out on balance.
At a glance
- Shift of tax liability: the recipient of the supply owes the VAT, not the invoice issuer
- The invoice is issued net without VAT — with the mandatory note "Reverse charge, recipient liable for VAT"
- Legal basis in Germany: § 13b UStG on the basis of the EU VAT System Directive
- Usually cash-neutral where input VAT is deductible: reported tax and input VAT cancel out
- Typical cases: EU services to businesses, construction work, building cleaning, certain electronics and metal goods
How the reverse charge procedure works
In the standard case of VAT taxation, the supplying business owes the VAT: it shows it openly on the invoice, collects it from the customer and pays it to the tax office. With reverse charge, this allocation of roles is reversed. The supplying business issues a net invoice without a tax amount and without a tax rate. The recipient of the supply becomes the person liable for the tax: they determine the VAT that applies to the net amount and report it to the tax office.
If the recipient is entitled to full input VAT deduction, they claim an equal-amount input VAT deduction in the same return. The tax to be reported and the deductible input VAT then cancel out — no money flows, the posting is a pure pass-through item. The situation is different for recipients with no or only partial entitlement to input VAT deduction (such as doctors, banks or small businesses): they owe the tax but may not, or may only proportionally, deduct it as input VAT and are therefore actually burdened by it.
Mandatory details on the invoice
A reverse charge invoice contains no tax statement and no tax rate, but instead mandatorily the note referring to the shift of the tax liability. The usual wording is "Reverse charge, recipient liable for VAT" or, for EU matters, the addition "Reverse charge". For cross-border supplies, the VAT identification numbers of both parties must also be stated. If the note is missing, the tax liability nonetheless remains with the recipient, but the invoice is formally defective and may jeopardise the input VAT deduction.
When does the reverse charge procedure apply?
The procedure is not an option but is legally limited to clearly defined groups of cases. The most common case in practice is other services (services) supplied by a business established in another EU country to a domestic business — for example advertisements, software subscriptions or consulting from providers in other member states. Here, reverse charge shifts the taxation to the country of the recipient of the supply, without the foreign provider having to register there.
In addition, there are purely domestic German reverse charge scenarios under § 13b UStG. These include construction work between construction businesses, building cleaning services, the supply of scrap and scrap metal, certain electronic goods such as mobile phones, tablets and games consoles above a value threshold, emission allowances as well as gas and electricity supplies between resellers. The list is repeatedly expanded by the legislator because fraud patterns shift.
EU services and One-Stop-Shop
For cross-border services between businesses (B2B) in the single market, reverse charge is the standard mechanism. This is to be distinguished from the One-Stop-Shop (OSS/IOSS), which applies to sales to private customers (B2C): there the tax liability remains with the seller but is reported in a bundled manner in the country of destination. Reverse charge therefore applies in the B2B area, OSS in B2C distance selling — both serve simplification but follow different logic.
Why the reverse charge procedure matters
For the tax authorities, the procedure is above all an instrument for combating fraud. In the dreaded VAT carousel, a "missing trader" sells goods with VAT shown, collects the tax received and disappears, while the buyer deducts the input VAT — damage running into the millions. Because with reverse charge no tax flows between the businesses at all, this pattern is ruled out. That is why particularly fraud-prone product groups such as mobile phones or emission allowances were brought into the procedure.
For businesses, reverse charge initially means simplification, but also a duty of care. The positive side is that cross-border transactions can be handled without foreign registration and liquidity is preserved, because no VAT has to be pre-financed. The downside is the duty to check: the recipient must recognise themselves that a reverse charge case is present, calculate the tax correctly and declare it properly. Mistakes — a tax amount shown wrongly or an overlooked tax liability — lead to back payments, denied input VAT deduction and, in the event of an audit, to considerable correction effort.
Reverse charge in the ERP system
In the ERP or accounting system, reverse charge is mapped via special tax keys. These keys generate no VAT shown on the invoice but post two amounts simultaneously in the background: the VAT owed to a tax account and — where deduction is permitted — the equal-amount input VAT deduction to an input VAT account. In this way both values automatically end up in the correct figures of the advance VAT return, without accounting having to calculate them manually.
For the system to get the right case, the master data must be correct. From the combination of the customer country, its VAT identification number, the business status and the type of service or goods, the ERP determines whether a regular invoice or a reverse charge document is created, and automatically sets the mandatory note on the invoice. For EU goods traffic, the system additionally generates the recapitulative statement (ZM) and checks the VAT ID via the confirmation procedure. How far a product maps this automation differs — examples can be found under "Related systems".
Tax keys and recapitulative statement
The correct tax key is the linchpin: a wrongly chosen key produces either an impermissible tax statement or a missing tax liability. For intra-Community B2B services, the ERP must also transmit the transaction in the recapitulative statement to the Federal Central Tax Office, so that the EU tax administrations can cross-check the transaction.
Distinction: reverse charge vs. intra-Community supply
Reverse charge is frequently confused with the tax-free intra-Community supply, because in both cases no VAT appears on the invoice. The difference lies in the type of transaction: the intra-Community supply concerns physical goods delivered from one EU country to another to a business — it is tax-free for the seller, and the acquirer taxes an intra-Community acquisition in the country of destination. Reverse charge, by contrast, typically concerns other services and certain domestic transactions, in which the tax liability passes to the recipient.
Also to be distinguished is the small-business rule under § 19 UStG: there, too, no VAT is shown, but for a completely different reason — the small business is exempt from tax collection, and no shift of the tax liability takes place. And whereas with reverse charge the recipient becomes the person liable for the tax, with a regular taxable domestic invoice the supplier always remains obliged. Anyone who maps these cases cleanly in the ERP via separate tax keys avoids the most common declaration errors.
Example
Example: software licence from another EU country
A German online retailer buys a software licence for 1,000 euros from a provider in Ireland. The Irish provider issues a net invoice for 1,000 euros without VAT, marked with both VAT IDs and the note "Reverse charge". Because this is an other service supplied by an EU business to a German business, the tax liability passes to the retailer.
In the ERP, accounting selects the appropriate reverse charge tax key. The system posts 190 euros (19% on 1,000 euros) as VAT owed and, at the same time, 190 euros as deductible input VAT. In the advance VAT return both amounts appear in the designated figures and cancel each other out on balance — the retailer effectively pays no VAT but has declared the transaction fully and audit-proof. The transaction does not flow into the recapitulative statement, since this reporting obligation falls on the supplying provider in Ireland.
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