VAT reverse charge: sound explanations for applying it correctly

Does the way VAT works sometimes seem obscure? We understand...

There are indeed a couple of subtleties to be aware of, such as choosing the right VAT regime, the rate to apply according to the service or product sold, etc. But there are also a few little-known specifics, such as the reverse charge of VAT.

But there are also a few little-known specifics, such as the VAT reverse charge. If you're here, you're probably concerned.

In this article, we'll take a look at the reverse charge in detail: how it works, its scope, how it's taken into account in an invoice, taxation and accounting.

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VAT reverse charge: definition

As you know, under normal circumstances, the selling company is responsible for collecting Value Added Tax (VAT), which it then passes on to the tax authorities.

VAT reverse charge reverses this mechanism, as the company invoices its customer exclusive of tax (HT), who then calculates the VAT and pays it to the Treasury.

This procedure is most often used in the construction and public works sector, and when trading with organizations registered outside France.

💡 Here's a diagram that clearly explains this mechanism applied to subcontracting in the building and civil engineering sector:

Initially, the reverse charge was created to facilitate VAT management for transactions with companies located outside France(and thus to encourage trade between countries!). Indeed, whether for intra-EU or non-EU sales, rates vary from country to country, and you need to be registered there to trade.

👉 By delegating the calculation and payment of VAT to the customer via the reverse charge system, companies not established in France are spared the need to register there in order to invoice customers.

In the building and civil engineering sector, the reverse charge is applied where subcontracting is the norm. This simplifies the tax declaration process.

When is the reverse charge applied?

Who is subject to the VAT reverse charge?

There are a number of different cases in which the reverse charge applies.

• 1️⃣ Transactions between companies registered in France in the following areas:
  • purchase and resale of electricity and natural gas;
  • new industrial waste;
  • transfers of greenhouse gas emission allowances.
    
    
• 2️⃣ Transactions in the construction and public works sector* (construction, demolition, cleaning). This case concerns subcontractors, whether they are :
  • established in France and working with :
    • a contractor holding the contract (lessee) also registered in France ;
    • a taxable contractor established abroad;
  • not established in France, but carrying out work on a building located in France for a contractor established in France.
    
    
• 3️⃣ Companies established in France which carry out commercial transactions :
  • with another company outside the EU ;
  • with another EU company (intra-Community VAT).

* Discover the full list of work covered by the VAT reverse charge (and exceptions) from the French Ministry of Finance.

⚠️ Please note: if you are concerned, the VAT reverse charge is not optional. If you fail to comply, you risk a penalty of 5% of the undeclared VAT due. Don't forget it! However, there are exceptions.

The exceptions

There are 2 types of exception to the VAT reverse charge:

• if the customer is not subject to VAT. In this case, the seller must invoice inclusive of VAT, in order to collect it (e.g. a private individual);
• if the purchase (whether made abroad or in France) concerns a service or merchandise in certain sectors identified by the tax authorities, such as catering services, disinfection work, passenger transport, etc.

How do I invoice a reverse-charge customer?

On your invoice, in addition to the usual compulsory information, you need to add a sentence about the reverse charge at the foot of the document.

There are several ways to include this phrase:

• the words " Reverse charge", which are legally self-explanatory;
• the phrase "Reverse charge , article 283 du CGI" to refer to the entire article of law;
• the words "Reverse charge , article 283.2 ter du CGI" to refer to a more specific paragraph of the general article of law;
• the words "Reverse charge of VAT by the lessee", also possible.

☝️ Please note: don't forget to indicate the amount before tax, i.e. without VAT.

Example of an invoice with VAT reverse charge:

💡 Tip: to make sure you're in the clear when issuing your invoices, we recommend using expert, tax-compliant invoicing software like INFast. There's no need to worry about VAT reverse charge when issuing your invoices or even your quotes: it appears automatically, and the amounts are displayed exclusive of tax. All to make your day-to-day work easier!

VAT reverse charge and accounting

Accounting for the VAT reverse charge isn't that complicated - it's a matter of accounting entries that balance out.

💡 Because nothing speaks louder than a concrete example, here's one for accounting for a subcontracting invoice.

Let's say you've called in a subcontractor to carry out work subject to 10% VAT, and he's sent you an invoice for 15,000 euros excluding VAT.

👉 Here are the associated accounting entries:

Now let's look at how to account for an intra-Community purchase of raw materials worth 2,500 euros with VAT at 20%, from a company located in the EU.

👉 Here are the associated accounting entries:

How to declare reverse-charge VAT (customer)

If you're a customer, for example the contractor on a project, and the subcontractor you're working with is a VAT-registered company, it 's up to you to declare the VAT.

This should be done on a monthly or quarterly basis, at the same time as you declare your sales.

To do this, you need to fill in the cerfa n° 3310-CA3. You must :

• indicate your sales excluding VAT on the one hand ;
• indicate the VAT collected.

💡 Your subcontractor may not be subject to Value Added Tax. In this case, there is no VAT to collect.

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VAT reverse charge summarized

• The VAT reverse charge is a reversal of the VAT collection mechanism: the customer pays the VAT to the Treasury. The seller or subcontractor, on the other hand, invoices the customer exclusive of VAT.
  
  
• The VAT reverse charge is mandatory for :
  • construction and public works subcontractors;
  • transactions with a company outside France (EU or non-EU);
  • certain types of transactions in France, as detailed above.
    
    
• The VAT reverse charge was created to simplify transactions with foreign companies, so that they don't have to register in France to pay the tax, and thus promote trade.
  
  
• To take account of the reverse charge, the seller must invoice exclusive of VAT, mentioning the customer's reverse charge, and the customer must declare the reverse charge to the French Treasury using form CA3. It is also important to include it in your accounting entries.