What Does Reverse VAT Charging Mean?

Reverse VAT charging represents a system where the obligation to calculate and pay the tax is transferred from the supplier to the recipient of the goods or services. Instead of the supplier including VAT in the invoice, the recipient self-calculates and declares the tax. This approach is especially effective in preventing tax fraud, such as the “missing trader” scheme, where the supplier does not remit the collected VAT to the budget.

In the European context, the reverse charging mechanism was introduced as a measure against tax fraud and is beneficial for both taxpayers and the budget. It is one of the most effective measures in the fight against tax fraud.

For which deliveries and services is the reverse VAT charging mechanism applied?

The reverse VAT charging mechanism is applied in specific sectors and under certain conditions where the risk of tax fraud is higher. In Bulgaria, this mechanism covers:

• Construction Services: Deliveries related to construction, repair, improvement, and maintenance of real estate.
• Waste Trading: Includes deliveries of scrap metals and other recyclable materials.
• Cereal and Technical Crops: Since January 1, 2014, the mechanism has been applied to deliveries of cereal and technical crops, as listed in Part II of Appendix No. 2 of the VAT Act.
• Greenhouse Gas Emissions Quotas: Trading in emissions quotas also falls under this regime.

It is important to note that the reverse charging mechanism does not apply to intra-Community deliveries, intra-Community acquisitions, triangular transactions, imports, and exports.

What are the responsibilities of the recipient of the delivery under reverse VAT charging?

When applying the reverse VAT mechanism, the recipient of the delivery carries the key responsibility for correctly declaring and accounting for the tax. Errors in this process can lead to sanctions, interest charges, and issues during future tax audits. Here are the main responsibilities and practical guidelines for their implementation:

1. Self-Calculating VAT and Issuing a Protocol under Article 117 of the VAT Act

   The recipient is required to self-calculate VAT by issuing a special protocol under Article 117 of the VAT Act. This document must include all mandatory details to be valid, such as:

   • Identification details of both parties in the transaction
   • The basis for reverse charging
   • The tax base and VAT amount
   • Date of issue

   The protocol must be issued within 15 days from the date of the taxable event or the date of the advance payment.

2. Declaring the Tax in Accounting Registers

   The calculated VAT must be properly reported in the recipient’s tax documents:

   • Sales Journal: This includes the self-calculated VAT, as it replaces the supplier’s obligation to calculate and remit the tax.
   • Purchases Journal: If the recipient has the right to a tax credit, the amount of calculated VAT can be deducted in the same tax period.
   • VAT Declaration: The recipient reports the calculated tax in the relevant column, including it both as a liability and as a right to a tax credit, if applicable.

   Missing a declaration can lead to administrative sanctions and the need to submit corrective declarations, complicating the process.

3. Documentation and Accounting Records

   In addition to issuing the protocol under Article 117, the recipient is obligated to maintain proper accounting documentation. This includes:

   • Invoices and Contracts: All documents supporting the transaction and the basis for reverse charging must be available during a potential tax audit.
   • Internal Accounting Entries: Properly classifying the transaction in the company’s accounting system ensures correct reporting.
   • Document Retention: According to the VAT Act, all documents related to VAT calculation and reporting must be retained for at least five years from the end of the year in which they were issued.

4. Checking Eligibility for VAT Credit

   Under reverse charging, the recipient can use a tax credit only if:

   • Their VAT registration is valid
   • The purchased goods or services are used for taxable transactions
   • The documentation is in order

   Otherwise, the calculated VAT becomes a real expense for the company. Therefore, it is important to analyze in advance whether the transaction falls within the scope of expenses eligible for VAT deduction.

Using VAT Credit under Reverse VAT Charging (continued)

The right to use a tax credit under the reverse VAT charging mechanism is a key factor in managing business costs. Although reverse charging eliminates the need to prepay VAT, claiming this credit is not automatic and requires compliance with a series of rules and requirements.

1. Adherence to Deadlines and Corrections of Submitted Declarations

   Proper administration of the tax credit begins with meeting the deadlines for its declaration. It is important to note that:

   • The tax credit must be reflected in the VAT declaration for the period in which the basis for deduction arose. This means that if the recipient has issued a protocol under Article 117 of the VAT Act for self-calculation of VAT, it must be included in the declaration for the same tax period.
   • If the tax credit is not used in the initial period, it can be deducted within the next 12 months. This is useful in cases of technical errors or delays in processing the documentation.
   • Correction of Already Submitted Declarations: If an audit reveals that an invoice was missed or that the tax credit was used improperly, the company can submit a corrective declaration to correct the error. In the case of serious omissions, the NRA may impose sanctions, so it is important to make these corrections promptly.

2. Limitations in Using Tax Credit

   Although the reverse VAT mechanism eliminates the need for the supplier to charge VAT, the recipient cannot always deduct this tax. The most common limitations include:

   • Use of Goods and Services for Exempt Supplies: If the received goods or services are intended for transactions that are exempt from VAT (e.g., certain medical services, educational activities, financial services), the recipient is not entitled to deduct the VAT charged.
   • Use of Assets for Personal Use: If a company purchases equipment used both for business and personal purposes (e.g., a company car used for personal trips), the VAT on this purchase may be partially or entirely ineligible for deduction.
   • Formal Errors in Documentation: If invoices or protocols contain inaccuracies, such as missing mandatory details, incorrectly calculated VAT, or incorrectly identified contractors, the NRA may refuse to recognize the tax credit.

3. Practical Guidelines for Optimizing the Tax Credit

   To avoid errors and omissions when using the tax credit, it is advisable for companies to adopt the following best practices:

   • Use of VAT Management Software: Automating the process significantly reduces the risk of errors and facilitates control over declaration deadlines.
   • Regular Internal Audits of Documentation: Periodically checking invoices, contracts, and protocols helps to identify inaccuracies in a timely manner.
   • Consultation with an Accountant or Tax Expert: Especially if the company engages in complex international transactions or operates in a specific sector where applying the reverse charging mechanism may be more complicated.
   • Developing an Internal Policy for Handling VAT Documents: Strict internal procedures for invoice approval and document retention can prevent administrative omissions and future sanctions.

Main Advantages and Disadvantages of the Reverse VAT Charging Mechanism

Advantages:

✅ Prevention of VAT Fraud: Eliminates the possibility for the supplier to issue an invoice with charged VAT and then fail to remit it to the budget.
✅ Improved Liquidity: The recipient does not need to prepay VAT, freeing up working capital.
✅ Simplified Accounting: In many cases, accounting is more transparent, especially for large businesses operating in the covered sectors.

Disadvantages:

❌ Administrative Burden for Recipients: Companies must calculate and declare VAT themselves, requiring efficient accounting organization.
❌ Sanctions for Errors: Incorrect calculations or failure to meet deadlines can lead to financial penalties.
❌ Limited Application: The mechanism cannot be used for all types of transactions, which may create uncertainty in its application.

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Conclusion

Reverse VAT charging is an important mechanism for reducing tax fraud and facilitating business operations. It removes the need for the supplier to charge VAT by transferring this responsibility to the recipient of the delivery. This allows for better liquidity in business and reduces the risk of uncollected taxes, but at the same time requires strict accounting management.

If you work in a sector where reverse VAT charging applies, it is important to understand the rules and consult an experienced accountant to avoid mistakes and penalties. Compliance with legislation not only prevents administrative issues but also helps you manage your business finances more effectively.

Author

Деси / Desi

is an accountant with over 10 years of experience, specializing in working with freelancers and small businesses. Based in Varna, she combines her professional expertise with a passion for making accounting accessible and easy to understand for everyone.

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