Reverse charge of VAT: solid explanations on how to apply it correctly

Do you sometimes find it hard to understand how VAT works? We understand...

There are a couple of subtleties you need to be aware of, such as choosing the right VAT regime, the rate to apply depending on the service or product sold, etc.

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

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

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VAT reverse charge: definition

As you know, under normal circumstances, it is the seller's responsibility to collect Value Added Tax (VAT) and pay it to the tax authorities.

VAT reverse charge reverses this mechanism, as the company invoices its customer exclusive of tax (excluding VAT), which 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 organisations registered outside France.

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

The reverse charge was originally created to make it easier to manage VAT on transactions with companies located outside France(and therefore to encourage trade between countries!). Whether the sale is within or outside the EU, the 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 do not have to register there in order to invoice customers.

In the construction and public works 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 VAT reverse charge applies.

• 1️⃣ Transactions between companies registered in France in the following areas:
  • the purchase and resale of electricity and natural gas;
  • new industrial waste;
  • transfers of greenhouse gas emission allowances.
    
    
• 2️⃣ Transactions in the building 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 (contractor) who is 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 Ministry of Finance.

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

The exceptions

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

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

How do you invoice a reverse-charge customer?

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

There are various ways of including this phrase:

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

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

Example of an invoice with reverse charge of VAT :

💡 Tip: to make sure you're in the clear when issuing your invoices, we recommend using expert invoicing software that complies with the requirements of the tax authorities, such as INFast. There's no need to think about reverse charge VAT when you're issuing your invoices or even your quotes: it appears automatically, and the amounts are displayed exclusive of tax. So you can simplify your day-to-day business!

VAT reverse charge and accounting

Accounting for the VAT reverse charge is not that complicated, it involves 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 used a subcontractor to carry out work subject to 10% VAT and they've sent you an invoice for €15,000 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 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 are a customer, for example the contractor on a project, and the sub-contractor you are working with is liable for VAT, it is 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 turnover.

To do this, you need to fill in Cerfa no. 3310-CA3. You must :

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

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

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Summary of the VAT reverse charge

• The reverse charge of VAT is a mechanism that reverses the collection of VAT: it is the customer's responsibility to pay it to the Treasury. The seller or subcontractor, on the other hand, invoices the customer exclusive of VAT.
  
  
• The VAT reverse charge is mandatory for :
  • subcontractors in the building and public works sector;
  • transactions with a company outside France (EU or non-EU);
  • certain types of transaction in France as detailed above.
    
    
• The reverse charge of VAT was created to simplify transactions with foreign companies, so that they do not have to register in France to pay the tax, and so encourage trade.
  
  
• To take account of the reverse charge, the seller must invoice his customer exclusive of VAT, mentioning the reverse charge, and the customer must declare the reverse charge to the French Treasury using form CA3. The reverse charge must also be included in the seller's accounting records.