At first glance, just a small phrase on the invoice: “the customer pays the tax”. But in reality, it can make all the difference between getting your books in order or explaining overpayments, penalties and strange discrepancies in your audit report. On the face of it, this is a normal amount, but in reality it is a completely different tax regime.
In this article, we will explain what reverse charge is, when it is used, and how reverse charge works for construction work, metals, mobile phones and other selected transactions.
We will also look at what an invoice must contain in the reverse charge regime, what the reverse charge codes mean and how they relate to the control declaration, and finally we will show how self-assessment of VAT and its accounting looks like in practice using concrete examples.
Reverse charge is a special tax mechanism in the field of VAT. In the normal regime, it works in a simple way: VAT is declared and paid by the person who sells the goods or services. A typical situation: the supplier issues an invoice, charges the tax base + VAT, collects the tax from the customer and then remits it to the state.
In the case of the reverse charge scheme, the principle is reversed. The obligation to declare and pay VAT is transferred from the supplier to the customer, i.e. to the person who receives the supply. In such a case, the supplier issues an invoice without VAT, on which he explicitly states that the tax is to be paid by the customer. VAT on this transaction is then not calculated, declared or paid by the supplier, but by the customer.
For the customer, this means that he has to make a so-called self-assessment of VAT. In practice, this means that he calculates the VAT himself on the amount on the invoice, declares this tax on the output (i.e. as if he had sold something himself) and at the same time – if he meets the conditions for deduction – applies the same VAT on the input. In one tax return, he thus acts both as the person who pays the tax and as the person who claims it back.
If the customer is fully entitled to the deduction, the reverse charge is money neutral for him. Although he calculates the amount of VAT and enters it in his return, he also claims it as a deduction in the same amount. However, it is certainly not neutral from an administrative point of view – he must correctly recognise that it is a reverse charge scheme, account for the invoice accordingly and report it correctly on the VAT return (and often on the control report).
Not sure how to do your taxes correctly so you don’t get it wrong? We can help you navigate the law, whether it’s dealing with a specific tax situation, preparing for an audit by the tax authority or defending yourself in court.
The first, and historically most important reason, is to combat tax evasion and so-called carousel fraud. For some commodities, such as metals, emission allowances, mobile phones, selected electronics or cereals, the classic system where VAT is paid by the supplier has proven to be very vulnerable.
The way these frauds worked was that one link in the chain collected VAT from the customer but never remitted it to the State and “disappeared”. The State then paid VAT deductions to other entities in the chain without anyone actually paying the tax at the beginning. These frauds were able to create huge losses in the billions of euros. That is why, for risky commodities, it was introduced that VAT is not paid by the intermediary in the chain, but directly by the customer who receives the supply. This effectively removes the riskiest link in the tax chain.
The second reason is to ensure taxation in the country of actual consumption within the European Union. EU law is based on the principle that value added tax should be paid where the goods or services are consumed. In cross-border business-to-business (B2B) transactions, it would therefore not be logical for VAT to be paid by the supplier in one state when the goods or services are actually “consumed” in the other state. Therefore, European rules allow, and often directly require, the recipient of a cross-border transaction to declare and remit VAT in its own country. In practice, this means that, for example, a Czech company that buys a service from a German supplier will receive an invoice without VAT and will self-assess in the Czech Republic.
Under the VAT Act, the domestic reverse charge applies only if three conditions are met:
If the customer is not a taxpayer (e.g. an end consumer or a small entrepreneur – a non-taxpayer), the reverse charge regime does not apply and the supplier invoices with VAT as standard.
The list of specific supplies under the reverse charge regime is quite long and changes continuously. The current form can always be found in the VAT Act and in the Government Regulation. For better orientation, it makes sense to distinguish between a permanent reverse charge scheme and a temporary reverse charge scheme, which is always introduced only for a certain period and may change over time.
The permanent reverse charge regime includes transactions for which the reverse charge is based directly on European legislation. Typical examples include:
It is expected that reverse charge will be used for these transactions in the long term, as these are structurally sensitive areas of the market where the traditional VAT regime would be significantly risky in terms of fraud and evasion.
In contrast, the temporary reverse charge applies to transactions that have been included in the reverse charge for a limited period of time – usually in response to specific problems in a particular sector. This group includes, for example:
For these supplies it is important to bear in mind that their inclusion under the temporary reverse charge regime may not be permanent. There may be extensions, adjustments or even a complete termination of the scheme. It is therefore always necessary to check the current status.
In practice, reverse charge for construction work is one of the most common situations you will encounter as a business. The construction industry is a sector that involves large volumes of contracts, various chains of suppliers and subcontractors, and is also an area of long-term risk for the government. That is why the VAT Act classifies selected construction and assembly work as a supply where the tax is not paid by the contractor but by the customer – of course, only if the legal conditions are met.
Typically, the regime of delegated tax liability for construction work includes, for example, the insulation of a house, reconstruction of a flat, extensions and additions, as well as roof installation, installation of electricity, water and gas distribution systems, installation of plasterboards, floor laying and many other real estate implementation activities.
Conversely, not every activity related to construction automatically falls under the reverse charge. Typically, various design, architectural, engineering and consulting services (studies, project documentation, construction supervision, etc.). Therefore, it is always a good idea to check what exactly is covered and how it is included.
A different situation arises when the same construction company provides its services to a non-taxpayer, for example a natural person – a non-entrepreneur, in which case the reverse charge regime does not apply. The construction company has to invoice VAT as standard, the tax is declared and paid by the construction company and the customer does not make any self-assessment.
The standard procedure is to issue a corrective tax document to reduce the tax base and VAT on the original invoice to the correct amount (typically zero), and at the same time enter the transaction correctly in the reverse charge regime (either in the form of a new invoice or by adjusting the original document according to the chosen procedure). You then need to reflect the error on your VAT return – either by means of an amended return (if you are still within the correct time limit) or a supplementary return. Alternatively, the customer must correct the deduction claim if he has claimed it on the wrong invoice.
Typically, this involves a VAT assessment, a penalty (usually 20% of the tax assessed when the tax is increased) and interest on late payment according to the Tax Code. In addition, errors in the control report are subject to fixed penalties for failure to file, late filing or failure to respond to the tax authorities’ request.
The domestic reverse charge regime applies only between VAT payers. Although the identified personis registered for selected cross-border transactions, he/she is treated as a non-taxpayer in the Czech Republic.
In such a case, the items should be clearly separated: items in the PDP regime should be shown net of VAT with a note on reverse charge and other items should be shown with VAT at the appropriate rate.
The reverse charge does not only apply to transactions between Czech taxpayers. It also plays a very important role in the case of VAT from abroad, i.e. for transactions within and outside the European Union. Both the European VAT Directive and the Czech VAT Act are based on the principle that the tax should be paid where the goods or services are actually consumed. To make this work in practice, reverse charge is used: the foreign supplier invoices without VAT and the Czech recipient of the supply self-assesses the tax in the Czech Republic.
In practice, you will encounter this regime mainly in two typical situations – the purchase of goods from another EU Member State and the receipt of services from abroad, either from the EU or from third countries (for example, the USA or the UK).
When a Czech VAT payer purchases goods from a supplier from another EU member state, the most common scenario is as follows: a Czech company places an order, the goods are physically transported from another EU member state to the Czech Republic and the foreign supplier issues an invoice without VAT.
This shifts the tax liability to the Czech Republic, where the goods have their actual recipient and where they are also “consumed”. Therefore, the Czech taxpayer must self-assess VAT, i.e. reverse charge in the Czech Republic.
Simply put, the Czech taxpayer calculates the Czech VAT on the value of the purchased goods in CZK, enters this tax in the tax return as output VAT and (if he meets the conditions for deduction) claims the same amount as input VAT deduction.
The VAT Act also specifies exactly when the obligation to declare this VAT arises. As a rule, when goods are purchased from the EU, the taxpayer is obliged to declare the tax either on the 15th day of the month following the month in which the goods were purchased or on the date of issue of the tax invoice – whichever is earlier. In practice, this means that you need to keep track not only of the date of supply, but also of the date of the invoice to ensure that you declare VAT in the correct tax year.
For a Czech taxpayer, the acquisition of goods from the EU with full deductibility is usually financially neutral – the same amount of output and input VAT will appear on the return. But administratively it is a burden: you have to correctly account for the acquisition of the goods, calculate the tax, fill in the relevant lines in the VAT return and often also the summary report (if you are the one who supplies the goods to the EU).
A similar principle applies to the receipt of services from abroad. Typical services include advertising for online marketing, software licences and use of cloud tools, consultancy, advisory and professional services, various IT services including web management and hosting, but also other digital services provided remotely.
For most of these services, the rule that the place of performance is the location of the recipient of the service, i.e. in our case the Czech Republic, applies. If you are a Czech VAT payer and you purchase such a service from a supplier abroad, the supplier will usually invoice you for the amount excluding VAT. The invoice may state, for example, that the customer pays the tax or that a “reverse charge” applies.
In such a case, the self-assessment of VAT comes into play again. As a Czech taxpayer, you first convert the value of the service into Czech crowns (if the invoice is issued in a foreign currency), calculate the Czech VAT on this amount, enter this tax in your return as output VAT, and apply the same amount as an input VAT deduction (if you use the service for an economic activity for which you are entitled to a deduction).
The result is again a tax-neutral situation, but only if you are fully entitled to the deduction. For example, if you provide exempt services without the right to deduct (typically certain financial and medical services, renting out selected real estate, etc.), the self-assessed VAT may be a real cost to you because you cannot claim the deduction or only to a limited extent.
Not sure how to do your taxes correctly so you don’t get it wrong? We can help you navigate the law, whether it’s dealing with a specific tax situation, preparing for an audit by the tax authority or defending yourself in court.
Non-taxpayers who purchase services or goods from abroad are a special case. Many businesses believe that as long as they are not VAT-registered, they do not have to deal with the tax. However, this is not the case for foreign supplies.
If a Czech non-taxpayer buys a service from another EU member state, he or she is often obliged to register as a so-called identified person for VAT.
An identified person is not a full-fledged VAT payer – he or she is not generally entitled to deduct tax and does not file regular VAT returns on domestic supplies. Nevertheless, certain obligations arise. It has to self-assess VAT on services or goods received from the EU, declare and pay this tax via a VAT return and at the same time cannot claim this tax as a deduction, precisely because it is not a classic VAT payer.
An invoice issued under the reverse charge looks different from a normal VAT invoice. The supplier does not include VAT on such an invoice, but only the taxable amount, i.e. the price excluding tax, and is obliged to clearly indicate that the reverse charge applies to the supply. The most common wording is “the customer pays the tax” or “reverse charge“.
As a rule, the invoice also contains a reference to the relevant legislation, for example, the text “reverse charge scheme under the VAT Act”. For selected domestic transactions, the invoice may also include a code for the object of the transaction, which is used for record-keeping purposes and for correct reporting in the control report.
The object of supply code is a numerical identifier which allows a specific transaction to be accurately classified in the correct category of supply under the reverse charge regime. In practice, it is mainly used for keeping records for VAT purposes, for the automatic generation of data for the control report and also in accounting and invoicing software, where you can, for example, select the appropriate code for the type of ‘construction work’ according to the settings of the software.
Historically, these codes were linked to the statutory VAT extract, but nowadays their role is largely taken over by the control declaration, where reverse charge transactions are reported in specific sections of the form.
When you say self-assessment of VAT, most entrepreneurs are interested in what the actual entry in the accounts looks like. The reverse charge scheme is not only reflected in the invoice and VAT return, but also in the accounting entries – both for the supplier and the customer.
A supplier who provides a supply under the reverse charge regime issues an invoice without VAT. In the accounts, he records only the taxable amount, i.e. the value of the supply net of tax – typically, for example, by entering 311 – Customers / revenue account (e.g. 602) and does not use account 343 – VAT at all, as he does not recognise output tax on this supply. In the VAT return, it then reports such a supply on a special line for the reverse charge regime, only in the value of the tax base, without output VAT.
A customer who is a VAT payer, on the other hand, carries out the actual self-assessment of VAT in the reverse charge regime. The procedure usually consists of three steps:
In the VAT return itself, the self-assessment is then reflected by showing the output VAT on the reverse charge transaction on the appropriate line – for example, on the line for the acquisition of goods from the EU, for services received from the EU or for the domestic reverse charge scheme, depending on the type of transaction. The input VAT will also appear on the lines for the tax credit. If the taxpayer is fully entitled to the deduction, the amount of output and input VAT is “cancelled” in the return and the transaction is financially neutral from a VAT perspective.
However, if the taxpayer has a reduced entitlement to deduction (for example, because part of his activity is exempt without entitlement to deduction), he will not claim as a deduction the whole of the self-assessed VAT, but only a proportionate part. The remainder of the VAT thus represents a real cost to the taxpayer, which reduces his economic result.
Find out how to complete your VAT return, when to file and where to find the online form.
Construction company A (a VAT payer) carries out insulation of an office building for company B (a VAT payer). Both companies are established in the Czech Republic, the property is in the Czech Republic, the work falls under construction and installation work under the VAT Act.
Invoice transferred tax liability: tax base: 500 000 CZK, VAT: 0 CZK
Charging to A (supplier): 311 / 602 in the amount of CZK 500,000, without charging output VAT
Accounting for B (customer):
In total, B will pay CZK 0 to the government if he is fully entitled to deduct. For him, the reverse charge is tax neutral, but he must not forget to report it correctly on his return and control statement.
A Czech VAT payer orders an online marketing service from a Slovak VAT payer agency. The place of supply according to the VAT rules is in the Czech Republic (residence of the recipient). The Slovak supplier issues an invoice without Slovak VAT in reverse charge.
Invoice: tax base: 50 000 CZK (converted to CZK), VAT: 0
Czech customer:
Again, this is a self-assessment of VAT, where formally the VAT is paid by the customer.
A Czech electronics wholesaler (VAT payer) sells mobile phones worth CZK 300,000 to another Czech VAT payer. The goods fall into the category where reverse charge applies in the Czech Republic when the value limit is exceeded (CZK 100,000 excluding VAT).
Invoice: tax base: CZK 300,000, VAT: CZK 0
The supplier charges only the base, the customer self-assesses the VAT ( 21% of CZK 300,000). In the VAT return, the reverse charge will appear on special lines for the supply of selected goods according to the annex to the law.
Reverse charge is a special VAT scheme in which the obligation to declare and pay tax is shifted from the supplier to the customer. It applies to selected domestic supplies (in particular construction and assembly work, supplies of real estate, metals, waste, selected electronics, etc.) and to cross-border transactions between businesses in the EU and with third countries. The condition for domestic reverse charge is that the place of supply is in the Czech Republic, both parties are VAT payers and the supply is as specified in the law or government regulation (or above the limit). In the case of foreign transactions, the aim is to tax the transaction where the actual consumption takes place – therefore the Czech recipient of goods or services from abroad performs self-assessment in the Czech Republic. If he is not a taxpayer, he may be obliged to register as an identified person who declares the tax but is not entitled to a deduction.
In practice, the reverse charge is mainly reflected in invoicing, control reports and accounting. The supplier issues an invoice without VAT with a clear indication of the reverse charge scheme (“the customer pays the tax”) and a transaction code, if applicable. The customer then self-assesses: it calculates the VAT on the invoice amount, declares it on the output and, if entitled, claims it on the input. With full entitlement, the impact on cash flow is zero, but the administrative burden is significant and errors can lead to overcharges and penalties.
If you, as a taxable person (or an identified person), supply a service with a place of supply in another EU Member State to a person registered for VAT, you must generally report this supply in a summary report and submit it electronically by the 25th day after the end of the month in which the supply was made.
Traditional imports of goods from third countries (e.g. USA, China) are taxed under the customs procedure – VAT is usually paid to the customs office upon clearance. However, there is a special regime where the taxpayer can declare VAT on imports only in the tax return (so-called “self-assessment on import” – an effect similar to reverse charge).
You automatically become an identified person when you meet any of the situations listed in the law – for example, you receive a service from another EU Member State with a place of performance in the Czech Republic, you purchase goods from the EU above a specified limit or you provide a service with a place of performance in another Member State. You are then obliged to file an application for registration of an identified person within 15 days of the occurrence of these facts.
Changes come mainly in the form of amendments to the VAT Act and government regulations – typically once every few years, sometimes more frequently in connection with European legislation or the fight against tax evasion. It is best to monitor the website of the Czech Financial Administration.
Not sure how to do your taxes correctly so you don’t get it wrong? We can help you navigate the law, whether it’s dealing with a specific tax situation, preparing for an audit by the tax authority or defending yourself in court.
Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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