Transfer of tax liability (reverse charge) in practice

The transfer of tax liability, also known as the reverse charge, is a regime in which the tax is paid not by the supplier but by the customer. To apply VAT correctly, you need to know when this mechanism applies and what it means for both parties to the transaction. Misjudging this is a common and costly mistake. In this article we explain the principle and the typical situations from everyday practice that entrepreneurs encounter.

How the reverse charge works

In an ordinary transaction, the supplier adds the tax to the price and pays it to the state. Under the reverse charge, the supplier invoices without tax and the obligation to declare and pay the tax passes to the customer. The customer can at the same time claim an input VAT deduction if the conditions are met, so the transaction is usually cash-neutral for them. The main aim of this mechanism is to curb tax fraud, particularly in high-risk sectors where a supplier could otherwise collect the tax without paying it to the state. Shifting the obligation to the customer significantly reduces this risk and makes the whole transaction easier for the state to check.

When it applies

The regime applies in precisely defined cases set out by law. It cannot be used at will by agreement between the parties. In practice you will come across it mainly with:

• construction work between VAT payers
• supplies of selected commodities, such as metals
• cross-border services where the recipient pays the tax
• supplies of goods with installation, under certain conditions

What to state on the invoice

An invoice under the reverse charge does not include an amount of tax, but it must contain the wording “prenesenie daňovej povinnosti” (reverse charge). This wording alerts the customer that it is they who must declare the tax, and it also means you cannot be faulted for it during a tax audit. A missing note is a frequent cause of problems, so set it up in your invoicing system in advance for the types of supply concerned rather than relying on adding it by hand.

The customer’s obligations

The customer calculates the tax on the price of the supply themselves, reports it in the return as output VAT and, if the conditions are met, claims the input VAT deduction at the same time. It is important to assign the supply to the correct tax period and to the correct section of the VAT control statement so that the figures match. An error in the classification or in the calculation can lead to a mismatch and to a request from the tax office, or even to additional tax being assessed. If the customer is not fully entitled to deduct VAT, for example because of exempt activities, the reverse charge can also mean a real cost for them, which needs to be taken into account when setting prices.

The cross-border reverse charge

Cross-border services where the place of supply is in the recipient’s country form a separate category. In that case the supplier invoices without tax and the recipient declares the tax in their own country under its rules. If the transaction takes place within the EU, these supplies must also be reported in the EC Sales List, so this obligation must not be forgotten either.

What to watch out for

The biggest risk is misjudging whether the regime applies at all. Incorrectly applied VAT can mean an additional assessment and penalties for either party to the transaction. Whenever you are in doubt about how a supply should be classified, consult a tax adviser, who will assess the situation under the current rules and prevent a mistake with financial consequences. Moreover, the list of supplies covered by the reverse charge is extended on an ongoing basis, so it pays to review a rule you have set up every now and then.

Related articles: VAT on sales of goods to the EU: OSS and distance sales, Excess VAT deduction: when it arises and how to get it, VAT on services supplied abroad: the place of supply.

Frequently asked questions

Who pays the tax under the reverse charge?

The tax is paid by the customer, not the supplier. The supplier issues an invoice without tax with a note on the reverse charge, and the customer declares the tax in their own return, while also claiming the input VAT deduction if the conditions are met.

What must a reverse-charge invoice contain?

In addition to the usual particulars, the note “prenesenie daňovej povinnosti” (reverse charge) must not be missing, and the invoice is issued without an amount of tax. A missing note is one of the most common shortcomings found in tax audits.