Reverse Charge vs Standard VAT
Compare reverse charge mechanism and standard VAT: when each applies, reporting requirements, and impact on cash flow.
VAT Mechanism Overview
Standard VAT
Seller charges VAT on the invoice and remits it to the tax authority. Buyer pays VAT and may deduct it as input VAT if registered.
Pros
- ✓Simple and familiar
- ✓Clear for B2C
- ✓No special registration needed
Cons
- ✗Cash flow impact for buyer
- ✗Seller must collect and remit
- ✗Cross-border complexity
Best for: B2C sales, domestic transactions
Cost: Standard rate: 17-27% (EU), 20% (UK)
Setup: Default mechanism
Reverse Charge
Buyer accounts for VAT instead of seller. Seller invoices without VAT. Used for B2B intra-EU sales and certain domestic transactions.
Pros
- ✓No VAT cash outflow for seller
- ✓Simplifies cross-border B2B
- ✓No VAT registration needed in buyer's country
Cons
- ✗Only for B2B with valid VAT numbers
- ✗Both parties must report
- ✗Compliance verification needed
- ✗Not for B2C
Best for: B2B intra-EU trade, certain domestic B2B
Cost: No VAT charged; buyer self-accounts
Setup: Requires VAT number verification
FAQ
When can I use reverse charge for cross-border sales?+
Reverse charge applies when: (1) you sell B2B to another EU country, (2) the buyer has a valid VAT number, and (3) goods/services are not exempt. You must show the buyer's VAT number on the invoice and report on EC Sales List.