Why do tax authorities like to reverse charge VAT?
Posted: Mon Dec 23, 2024 4:16 am
Many countries around the world have a reverse charge system, which is used extensively by the UK and EU to tax B2B cross-border transactions. It is essentially a way of taxing transactions that are the property of the business’s customers – which effectively recognises the spirit behind VAT, which is that it is a consumption tax.
Why do tax authorities like to reverse charge VAT?
A reverse charge is a way of self-assessing VAT at your local VAT rate on estonia phone number example purchases - you pay that VAT on your VAT return and get a credit on the same VAT return (under your business's normal VAT recovery profile - see more on this below). If we didn't have a reverse charge system, another option would be for your overseas supplier to register for VAT in the UK and charge you the same local VAT that you self-assessed.
The reasons why tax authorities prefer the reverse charge mechanism over VAT registration of overseas suppliers are as follows:
There is no value to the tax authorities in the extra administration created by having multiple overseas suppliers register for VAT as they need to audit them, process VAT returns etc. They receive the same amount of VAT from you applying the reverse charge;
If the services are subject to local VAT rather than reverse charge VAT, the overseas tax authorities do not have to deal with expensive overseas VAT refund claims;
Through the reverse charge system, the tax authorities can hold locally established businesses accountable for non-payment of VAT. This is not so straightforward if they have their overseas suppliers register for VAT and account for VAT.
For some of the reasons outlined above, the EU significantly expanded the scope of its reverse charge mechanism in 2010.
Why do tax authorities like to reverse charge VAT?
A reverse charge is a way of self-assessing VAT at your local VAT rate on estonia phone number example purchases - you pay that VAT on your VAT return and get a credit on the same VAT return (under your business's normal VAT recovery profile - see more on this below). If we didn't have a reverse charge system, another option would be for your overseas supplier to register for VAT in the UK and charge you the same local VAT that you self-assessed.
The reasons why tax authorities prefer the reverse charge mechanism over VAT registration of overseas suppliers are as follows:
There is no value to the tax authorities in the extra administration created by having multiple overseas suppliers register for VAT as they need to audit them, process VAT returns etc. They receive the same amount of VAT from you applying the reverse charge;
If the services are subject to local VAT rather than reverse charge VAT, the overseas tax authorities do not have to deal with expensive overseas VAT refund claims;
Through the reverse charge system, the tax authorities can hold locally established businesses accountable for non-payment of VAT. This is not so straightforward if they have their overseas suppliers register for VAT and account for VAT.
For some of the reasons outlined above, the EU significantly expanded the scope of its reverse charge mechanism in 2010.