The buyer also risks a reverse charge - the tax settlement
The reverse charge mechanism, i.e. the buyer's obligation to tax the purchase transaction, applies not only to foreign trade, but also to domestic trade. The provisions on the application of the special procedure mentioned in the VAT Act should be known to both the seller and the buyer of goods or services. The buyer, and not just the service provider, also risks in reverse charge. Especially that since 2017, the catalog of activities covered by the reverse charge procedure has been expanded.
Reverse charge in domestic trade
The reverse charge mechanism is shifting the VAT settlement obligation from the seller to the buyer of the good or service. In this case, the seller does not indicate VAT on the sales invoice.
A complete list of goods and services to which the reverse charge rules apply is included in Annex 11 and 14 to the VAT Act. Since 2017, the reverse charge mechanism has been applied to construction services where the service provider is providing these services as a subcontractor.
Conditions for the application of reverse charge
In the case of the sale of goods, the reverse charge procedure is used for the sale of goods listed in Annex 11 to the VAT Act. Moreover, this procedure will apply when:
- the buyer is an active VAT payer,
- the seller is an active VAT payer,
- the delivery of goods is not covered by the exemption referred to in Art. 43 sec. 1 paragraph 2 or article. 122 of the VAT Act.
As for the application of the reverse charge procedure for the provision of construction services, the following conditions must be met:
- the customer is registered as an active VAT payer,
- the service provider is registered as an active VAT payer and has the status of a subcontractor,
- the subject of purchase are services listed in Annex 14 to the VAT Act.
Seller's obligation when selling with reverse charge
As already mentioned, the buyer also risks the reverse charge due to the fact that he is obliged to charge VAT. Therefore, the seller, when issuing the invoice, does not charge VAT, but only provides the net price. In the field, the VAT rate uses the word "eg" (not subject to tax) or the common "oo" or "VAT is settled by the buyer". Additionally, the invoice should contain the annotation "reverse charge". Taxpayers who sell domestically using the reverse charge procedure are required to submit VAT-27 summary information.
Buyer's obligation when purchasing with a reverse charge
When purchasing goods or services covered by the reverse charge procedure, the buyer is obliged to report the VAT due by taxing the purchase at the rate appropriate for the given goods / service. The buyer is obliged to show this transaction in the VAT-7 declaration in the case of monthly VAT settlements or in the VAT-7K declaration in the case of quarterly VAT settlements.
Active VAT taxpayers using the purchased goods for taxable sale have the right to deduct the input VAT in the reverse charge procedure. As a consequence, the transaction made for them becomes neutral with regard to VAT.
Does the buyer also risk in reverse charge?
The obligation to issue a sales invoice rests on the seller, therefore is the buyer actually risking the reverse charge?
In practice, a situation may arise where the seller does not fulfill his obligations related to the correct classification of the goods or services sold. Therefore, it will charge VAT even though it sells the goods listed in Annex 11 or provides services contained in Annex 14 to the VAT Act. Then the buyer is at risk. Why? Pursuant to Art. 88 sec. 3a point 2 of the Act, the buyer in such a situation does not have the right to deduct VAT, despite the fact that he received the invoice with the tax charged.
Art. 88 sec. 3a point 2:
Invoices and customs documents shall not constitute grounds for reducing the output tax and refunding the tax difference or returning input tax if: (...)
2) the transaction documented with an invoice is not subject to taxation or is tax-exempt; (...) This means that both the buyer and the seller must be familiar with the applicable laws regarding the reverse charge mechanism. Therefore, if the buyer has doubts about the applied form of taxation of the transaction on the purchase invoice received, he should make every effort to determine whether the purchased product or service is subject to the reverse charge procedure or not.
The seller's good will to determine the PKWiU of the goods sold may be helpful here. This is because it makes it easier to check whether the goods or services are listed in Annex 11 or 14 to the VAT Act.
In practice, the reverse charge mechanism causes difficulties when it comes to the correctness of its accounting. This is mainly due to problems in classifying the goods and services sold. Currently, the seller is not obliged to include PKWiU numbers on the invoice, and this increases the risk of the buyer who may unknowingly deduct VAT from the invoice, from which the deduction is not entitled.