Comprehensive EU VAT compliance guides

The reverse charge mechanism explained

The reverse charge mechanism represents one of the most significant simplifications in cross-border EU taxation. Under normal VAT operation, the supplier charges VAT on their invoice and remits it to their local tax authority. The customer then claims an input deduction through their VAT return. This creates administrative complexity when supplier and customer are in different countries, as it would require the supplier to register for VAT in the customer's country merely to collect and remit tax.

Reverse charge shifts the tax point to the customer. The supplier issues an invoice without VAT, noting that the reverse charge applies. The customer then accounts for VAT on the transaction through their own return, calculating the tax as if they had supplied the goods or services to themselves. Where the customer is entitled to recover VAT, they simultaneously claim an input deduction for the same amount, creating a net nil position. The administrative benefit is clear: neither party needs to deal with a foreign tax authority for this transaction.

The scope of mandatory reverse charge varies by transaction type. For services supplied business-to-business where the general rule places the supply in the customer's country, reverse charge applies automatically. This covers most consultancy, professional services, software licensing, and digital services between VAT-registered businesses. For goods, reverse charge generally does not apply within the EU single market; instead, the zero-rating and acquisition tax mechanism handles cross-border movements.

Certain domestic supplies also fall under reverse charge in specific member states. Construction services, mobile phones, computer chips, and emissions allowances commonly trigger domestic reverse charge under national anti-fraud measures. These rules require careful attention because they vary significantly between countries and change frequently as tax authorities respond to perceived fraud risks.

Understanding the One-Stop Shop schemes

The One-Stop Shop represents a fundamental change in how businesses manage VAT obligations for sales to consumers across the EU. Before July 2021, businesses making distance sales to consumers above certain thresholds had to register for VAT in each destination country. A French retailer selling to customers in Germany, Spain, and Italy would need German, Spanish, and Italian VAT registrations, each with its own compliance calendar and reporting requirements.

The Union OSS scheme now allows businesses established in the EU to report all B2C sales of goods dispatched from within the EU to consumers in other member states through a single return filed in their home country. The home country tax authority then distributes the collected VAT to the appropriate destination countries. This dramatically simplifies compliance while ensuring that VAT is still collected at the correct destination rate.

The Union OSS covers intra-Community distance sales of goods regardless of value. It also covers B2C supplies of services where the place of supply is in a member state where the supplier has no establishment, except for those services covered by the existing special scheme for telecommunications, broadcasting, and electronic services which has been integrated into the broader OSS framework.

Registration is optional but highly recommended for businesses making cross-border B2C sales. Once registered, the business must use OSS for all eligible transactions rather than picking and choosing. Returns are filed quarterly with VAT paid in euros, regardless of the currencies used in underlying transactions. Records must be kept for ten years from the end of the year in which the transaction occurred.

The Import One-Stop Shop

The Import One-Stop Shop addresses goods shipped from outside the EU directly to consumers within the bloc. Before IOSS, such shipments under 22 euros were exempt from import VAT, creating a competitive disadvantage for EU sellers who had to charge VAT from the first euro. The exemption was also widely exploited through deliberate undervaluation.

Under IOSS, sellers of goods valued up to 150 euros per consignment can register in one EU member state and charge VAT at the point of sale based on the destination country's rate. The goods then clear customs under the IOSS procedure without VAT being collected at the border. This speeds delivery significantly and provides consumers with a single, transparent price including all taxes.

IOSS registration requires appointing an intermediary for businesses established outside the EU, unless their country has a mutual assistance agreement with the EU. The intermediary assumes responsibility for the VAT obligations on behalf of the foreign supplier. Monthly returns are required, and strict record-keeping rules apply.

VAT invoicing requirements

EU VAT law establishes minimum requirements for invoices used to support input tax deductions and document compliance. While electronic invoicing is increasingly the norm, the content requirements apply regardless of format. Understanding these requirements prevents common errors that can delay VAT recovery or create compliance issues during audits.

Every VAT invoice must contain certain mandatory elements: a unique sequential number identifying the invoice, the date of issue, the VAT identification number of the supplier, the VAT identification number of the customer for B2B supplies, the full name and address of both parties, the quantity and nature of goods supplied or the extent and nature of services rendered, the date on which the supply was made or completed (if different from invoice date), the taxable amount per rate, the VAT rate applied, and the VAT amount in the currency of the member state where the supply is treated as taking place.

For supplies where reverse charge applies, the invoice must clearly indicate that the customer is responsible for accounting for VAT, typically through a statement such as "Reverse charge" or "VAT due by the recipient" along with a reference to the applicable legal provision. No VAT amount appears on such invoices, but the net value must still be stated.

For zero-rated intra-Community supplies, the invoice must show both parties' VAT numbers and indicate the zero-rating with an appropriate notation such as "Intra-Community supply of goods" or a reference to Article 138 of the VAT Directive. Documentary evidence that the goods left the member state of dispatch forms a critical part of the overall compliance package for such supplies.

B2B versus B2C transactions

The distinction between business-to-business and business-to-consumer transactions affects virtually every aspect of cross-border VAT treatment. Place of supply rules, applicable rates, compliance mechanisms, and verification requirements all depend on whether the customer is acting in a business capacity.

For services, the general rule places B2B supplies in the country where the customer has established their business. The supplier invoices without VAT, the customer self-assesses under reverse charge, and both parties report the transaction on their respective returns. No additional registration is typically required, and verification of the customer's VAT number provides evidence of their business status.

B2C services follow different rules. Digital services, telecommunications, and broadcasting are taxed where the consumer is located regardless of where the supplier is established. Most other services are taxed where the supplier is established, unless specific exceptions apply. The complexity of these rules often requires careful analysis of the specific service being provided.

For goods, B2B intra-Community supplies can be zero-rated when both parties are registered, goods physically move between member states, and proper documentation exists. The customer accounts for acquisition tax in their country. B2C sales were historically taxed based on origin up to certain thresholds, then destination above those thresholds, but the OSS reforms have simplified this by making destination-based taxation the default with optional use of the OSS for compliance.

Determining customer status requires appropriate evidence. For B2B treatment, the supplier should obtain and verify the customer's VAT number. The customer should also confirm they are acting in a business capacity for the specific transaction, as businesses can also make purchases for private use that should be treated as B2C. Standard terms of sale often include declarations addressing this point.

Distance selling and thresholds

Distance selling rules apply when businesses sell goods to consumers in other member states, dispatching those goods from their own country. The 2021 reforms introduced a pan-EU threshold of 10,000 euros per year for all intra-Community distance sales combined. Below this threshold, businesses can charge VAT at their home country rate. Above it, they must either charge VAT at destination rates and register individually in each destination country, or use the OSS.

The threshold applies to total distance sales across all EU member states combined, not per country. It also includes B2C supplies of digital services. Once exceeded, or if the business voluntarily opts into the destination-based system, the business must continue using that basis for at least two calendar years.

For businesses regularly selling across the EU, the OSS almost always makes sense regardless of threshold status. The administrative simplification of single-country registration and quarterly returns typically outweighs the slight complexity of charging multiple VAT rates to different customers.

Record-keeping and audit requirements

VAT compliance depends heavily on maintaining adequate records. Every transaction that affects VAT liability, recovery, or reporting should be documented in a way that allows reconstruction during an audit. For cross-border transactions, this typically includes contracts, purchase orders, invoices, proof of payment, transport documentation, customs declarations where applicable, and correspondence relating to the transaction.

Special requirements apply for specific transaction types. Intra-Community supplies require evidence that goods actually left the country of dispatch, commonly through transport documents, insurance, or customer acknowledgment of receipt. OSS users must keep detailed records sufficient to verify the amounts declared on returns and make these available to any member state that requests them.

Retention periods vary by member state but generally range from five to ten years from the end of the tax year to which records relate. Businesses should apply the longest applicable period across their operations, storing records in formats that remain accessible throughout that period. Electronic storage is generally permitted provided authenticity, integrity, and legibility can be demonstrated.