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What does a VAT reverse charge mean?

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Overview

You want to understand what is meant by 'Reverse Charge' when talking about VAT.

Environment

Avalara Avatax

Avalara Global

Resolution

  • When EU businesses in different EU countries are trading goods or services, a special mechanism (‘reverse charge’) is used for VAT because the 28 member states have not been able to harmonize their VAT systems. 
  • The vendor does not have to charge the business any VAT as normal – the sale is VAT exempt as an ‘intra-community supply’ (export or import in simple terms). 
  • The responsibility for recording the output VAT of the vendor switches to the business receiving the goods. 
  • The business must make two entries in their VAT ledger – input and output (their vendor’s output VAT). 
    • The two entries cancel each other out, and so there is no cash flow movement.
  • Avalara handles this as a purchase invoice transaction in AvaTax for Global enabled customers.