The reverse charge is an indirect tax mechanism under which the responsibility for paying VAT due to the tax authorities is shifted from the supplier to the customer. The reverse charge applies only in B2B transactions—it does not apply in B2C transactions (primarily because individual consumers do not have a VAT ID number). The reverse charge simplifies the VAT compliance burden, helps to prevent VAT fraud and ensures that VAT is paid.
The reverse charge is mandatory for certain supplies and services in the Netherlands. When a supplier wants to apply the reverse charge mechanism, it will issue an invoice without VAT and indicate on the invoice that the reverse charge is being applied. The customer then calculates and pays the VAT due to the tax authorities.
The Dutch Supreme Court recently provided more clarity on the obligations surrounding the application of the reverse charge mechanism. Although the case before the court involved the supply of non-ferrous metals, the decision is relevant to other reverse charge regulations. . What does the Supreme Court decision mean for you?
Facts of the case
A Dutch entrepreneur supplied non-ferrous metals to a German entrepreneur. Before making the first delivery, the entrepreneur checked the German VAT ID number of the customer, which was invalid. Nevertheless, the Dutch entrepreneur decided to supply the goods to the customer and issued an invoice with VAT reverse charged. The customer picked up the goods and paid cash. Despite making repeated requests to the customer for a valid VAT ID number, it was not disclosed to the Dutch entrepreneur.
The Dutch tax authorities took the position that the person who made contact with the non-ferrous metal seller acted as a straw man, that the actual customer was unknown and that it was not possible to ascertain whether that customer declared VAT in Germany. As a result, the authorities believed that the reverse charge cannot be applied because the customer’s identity is unknown. The Dutch entrepreneur disagreed and brought the case before the Supreme Court.
Decision of the Supreme Court
The Supreme Court held that the VAT reverse charge can only be applied if the tax authorities are able to determine the actual identity of the customer to whom liability for paying VAT is shifted. If the customer’s identity remains unknown, this is impossible. The court stated that knowledge of the customer's identity is necessary for the tax authorities to be able to properly administer and control the levying and collection of VAT from the customer.
Impact for practice
Although the application of the reverse charge cannot be denied to entrepreneurs if they inadvertently use an invalid or incorrect VAT ID number on an invoice when applying the reverse charge, entrepreneurs still have to carefully investigate to whom they are making a supply (e.g., by verifying the customer’s identity, for example, on the basis of a passport or Chamber of Commerce documents). However, if the customer’s identity remains unknown, the reverse charge mechanism may not be applied. This principle applies regardless of the size of the supply of goods; even though normally only an entrepreneur would purchase a large quantity, the seller cannot assume that it is making a supply to an entrepreneur to whom VAT liability is shifted.
Although the Supreme Court does not make it mandatory for the seller to have the VAT number of its customer, having a valid VAT number is a good practice and should help to minimize the possibility of questions by the tax authorities. But having a VAT ID number on its own is not enough—in the Netherlands, the identity of the customer also is required.
It should be noted that the rules for intra-EU supplies were tightened on 1 January 2020. An intra-community supply exists where a supply of goods is made to a trader in the EU and the goods are then transported to another EU member state. A zero rate VAT/exemption will apply to this transaction if the customer has a valid VAT ID number from an EU Member State different than the Member State of departure of the goods. Correct recapitulative statements also have to be filed. If the customer does not have a valid VAT number, the zero rate/exemption will be disallowed and VAT will be due by the supplier. (Suppliers can check the validity of (foreign) VAT numbers via the European Commission's VIES system). If the supplier does not have a VAT ID number for the customer and the transaction turns out to be part of a fraudulent chain, there may be a risk of an additional tax assessment.
More information?
Applying the reverse charge mechanism is mandatory in specific cases and ensuring the correct application is important for both the supplier and the customer. If a supplier forgets to apply the reverse charge and incorrectly mentions VAT on the invoice that it also pays to the tax authorities, the tax authorities in the Netherlands generally will not charge VAT to the customer. If the supplier is unable to pay the VAT (e.g., cash-flow issues) in this instance, the authorities will look to the customer for the VAT due. VAT-registered customers that receive an invoice that does not reference the application of the reverse charge should not deduct and pay the VAT on the invoice but rather ask the supplier to issue a corrected invoice.