Reverse charge mechanism explained
Reverse charge mechanism applies to VAT on goods or services purchased in one country to be consumed in another.
It relates to EU VAT taxation system rules which stipulate the following:
If your business is trading with another from a different EU country, VAT accrues in the country where your purchase is consumed.
This means that reverse charge mechanism is applicable if the consuming country isn’t the one where you’re making your purchase.
How it works:
Intra-EU acquisition of goods
Here’s an example.
Your yacht business is VAT registered in Malta and you’re buying goods from a Spanish supplier. Your supplier, however, doesn’t charge VAT on the sale. Instead, they request that you supply them with your Maltese VAT number. This makes you responsible for declaring and paying the VAT in Malta.
This also means that if the goods you acquired are for your business, you are allowed to subtract the VAT on your VAT return.
Due to yacht and aircraft mobility, their buying and movement patterns frequently encounter intra-EU acquisition treatment.
Reverse charge mechanisms apply to services purchased abroad. This is true whether you’re purchasing business related services from another EU country, or from outside the EU.
As with goods, the mechanism requires you to pay the VAT in the EU country where your business belongs. In doing so, you can therefore use your right to deduct tax where appropriate.
The only difference is that you must provide the EU supplier with your VAT number. For a supplier outside the EU, however, this isn’t necessary.
Operating a compliant yachting and aviation reverse charge mechanism across the EU is not automatic. Though there are substantial benefits when used correctly, there are also the following exceptions and limitations to consider:
- The correct cross-EU setup must be in place.
- Errors can occur.
- VAT penalties and interest can accrue if proper compliance isn’t achieved.
Our timely transaction advisory combined with ongoing accounting helps you stay in control at all times. This means you reap all the rewards whilst avoiding all the risks.