Reverse Charge: What It Is and How to Self-Assess VAT

Quick Overview: How Reverse Charge Works

• The supplier issues an invoice without VAT and states that the customer is responsible for paying the tax.
• The customer calculates and reports the VAT themselves.
• If the customer is fully entitled to a deduction, they can generally deduct the same amount at the same time.
• In the Czech Republic, this regime applies only to transactions specified by law and when certain additional conditions are met.
• For cross-border transactions, the rules vary depending on whether the transaction involves goods or services and the supplier’s country of residence.

The reverse charge mechanism does not, therefore, mean that VAT is not paid. What changes primarily is the party responsible for reporting the tax. In the case of a domestic reverse charge, this is the customer, while the supplier issues an invoice without specifying the VAT amount.

Not sure if the reverse charge applies to your invoice? An error in the VAT regime may require you to correct both your invoices and tax returns. Our attorneys will help you assess the correct tax procedure and its legal implications.

What Is the Reverse Charge Mechanism (Reverse Charge VAT)?

Reverse charge is a special tax mechanism in the area of VAT. Under the standard regime, it works simply: the party selling the goods or services declares and remits the VAT. A typical scenario: the supplier issues an invoice, charges the tax base plus VAT, collects the tax from the customer, and then remits it to the government.

Under the reverse charge mechanism, this principle is reversed. The obligation to report and pay VAT shifts from the supplier to the customer—that is, to the party receiving the goods or services. In such cases, the supplier issues an invoice without VAT, explicitly stating that the customer is responsible for paying the tax. The VAT on this transaction is then neither calculated, declared, nor remitted by the supplier, but rather by the customer.

For the customer, this means they must perform what is known as “self-assessment” of VAT. In practice, this means that the customer calculates the VAT on the amount stated on the invoice, reports this tax as output tax (as if the customer had sold something themselves), and at the same time—if they meet the conditions for a deduction— claims the same amount as input tax. In a single tax return, they thus act both as the party paying the tax and as the party claiming it back.

If the customer is fully entitled to a deduction, the reverse charge is financially neutral for them. Although they calculate the VAT amount and report it on the return, they simultaneously claim it as a deduction in the same amount. However, it is certainly not neutral from an administrative standpoint—the customer must correctly identify that this is a reverse charge transaction, account for the invoice accordingly, and report it correctly in the VAT return (and often in the control statement as well).

Why Does the Reverse Charge Mechanism Exist?

The first—and historically most important—reason is to combat tax evasion and so-called “carousel fraud.” For certain commodities, such as metals, emissions allowances, cell phones, select electronics, or grains, the traditional system—in which the supplier collects and remits VAT—has proven to be highly vulnerable.

These fraud schemes worked as follows: one link in the chain collected VAT from the customer but never remitted it to the government and simply “disappeared.” The government then issued VAT refunds to other entities in the chain, even though no one at the beginning had actually paid the tax. These fraud schemes caused enormous damage amounting to billions. That is precisely why, for high-risk commodities, it was established that VAT is not paid by an intermediary in the chain, but directly by the customer receiving the goods or services. This effectively removes the riskiest link from 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 transactions between businesses (so-called B2B), it would therefore not be logical for the supplier in one country to pay VAT when the goods or services are actually “consumed” in another country. For this reason, European rules allow—and often explicitly require—that, for cross-border transactions, the recipient of the supply declare and pay VAT in their own country. In practice, this means that, for example, a Czech company that purchases a service from a German supplier will receive an invoice without VAT and will self-assess the tax in the Czech Republic.

When Is the Reverse Charge Mechanism Applied Domestically?

According to the VAT Act, the domestic reverse charge mechanism applies only when three conditions are met:

1. The place of supply is in the Czech Republic.
2. Both the supplier and the customer are VAT taxpayers.
3. The transaction involves selected goods or services, or a specified value threshold must be met —typically, for example, with certain electronics, where the reverse charge applies only to deliveries exceeding 100,000 CZK excluding VAT. The specific definition is based on the VAT Act and its implementing regulations.

If the customer is not a VAT payer (for example, an end consumer or a small business owner who is not a VAT payer), the reverse charge mechanism does not apply, and in such cases, the supplier invoices the amount including VAT as usual.

Typical Goods and Services Subject to the Reverse Charge Mechanism

The list of specific transactions subject to the reverse charge mechanism is quite long and, moreover, changes on an ongoing basis. You can always find the current version in the VAT Act and in the government regulation. For better clarity, it is helpful to distinguish between the permanent reverse charge mechanism and the temporary reverse charge mechanism, which is always introduced for a specific period and may change over time.

Permanent Reverse Charge Mechanism

The permanent reverse charge mechanism applies to transactions where the reverse charge is based directly on European regulations. Typical examples include:

• the supply of gold, including investment gold (unless exempt from tax),
• supplies of waste, scrap, and secondary raw materials,
• supplies of real property ( e.g., the sale of a newly constructed office building to another VAT-registered business),
• construction and installation work performed between VAT-registered businesses,

For these transactions, it is assumed that the reverse charge mechanism will be applied on a long-term basis, as these are structurally sensitive market sectors where the traditional VAT regime would pose a significant risk in terms of fraud and tax evasion.

Temporary Reverse Charge Regime

The temporary reverse charge mechanism, on the other hand, applies to transactions that have been included in the reverse charge system for a limited period—usually in response to specific problems in a given sector. This group includes, for example:

• the transfer of greenhouse gas emission allowances,
• supplies of electricity and gas between authorized market participants,
• the supply of green certificates or other electricity certificates between parties that trade in them as part of their economic activities,
• the supply of certain electronics: cell phones, laptops, tablets, game consoles, and certain integrated circuits, generally when a specified value threshold is exceeded,
• the supply of metals (raw/semi-processed), including precious metals,
• the provision of electronic communications services ( typically telecommunications services between operators),
• the supply of grains, industrial crops, and sugar beets within a defined scope.

For these transactions, it is important to keep in mind that their classification under the temporary reverse-charge regime may not be permanent. The regime may be extended, modified, or even completely terminated. Therefore, it is always necessary to verify the current status.

Reverse Charge – Construction Work

In practice, the reverse charge mechanism for construction work is one of the most common situations you will encounter as business owners. The construction industry involves large volumes of contracts and complex chains of suppliers and subcontractors, and it is also considered a high-risk sector by the government in the long term. For this reason, the VAT Act classifies certain construction and installation work as transactions in which the tax is paid not by the contractor but by the customer —provided, of course, that the legal conditions are met.

The reverse charge mechanism for construction work typically applies , for example , to home insulation, apartment renovations, additions, and extensions, as well as roof installation, the installation of electrical, water, and gas systems, plasterboard installation, flooring installation, and a range of other construction activities on real estate.

Conversely, not every construction-related activity automatically falls under the reverse charge mechanism. Typically, this excludes various design, architectural, engineering, and consulting services (studies, project documentation, construction supervision, etc.). Therefore, it is always a good idea to verify exactly what the subject of the supply is and how it is classified.

We know from experience that determining the correct tax regime can be particularly problematic for construction contracts. It is not enough to rely solely on the description listed on the invoice—what matters is the actual scope of the work performed and its correct classification. If taxpayers are unsure whether a specific transaction falls under the reverse charge regime, it’s worth resolving the issue before issuing the invoice.

In borderline cases, it is also possible to request a binding assessment from the tax authority as to whether the reverse charge mechanism applies to a specific transaction.

A different situation arises when the same construction company provides its services to a non-VAT payer, such as an individual who is not a business owner. In such a case, the reverse charge mechanism does not apply. The construction company must issue an invoice with VAT as usual; it declares and pays the tax, and the customer does not perform any self-assessment.

Reverse Charge and VAT from Abroad

The reverse charge mechanism does not apply only to transactions between Czech taxpayers. It also plays a very significant role in VAT from abroad, i.e., in transactions both within and outside the European Union. Both the European VAT Directive and the Czech VAT Act are based on the principle that tax should be paid where the goods or services are actually consumed. To make this work in practice, the reverse charge mechanism is used: a foreign supplier issues an invoice without VAT, and the Czech recipient of the supply self-assesses the tax domestically.

In practice, you’ll encounter this system mainly in two typical situations— the purchase of goods from another EU member state and the receipt of services from abroad, whether from the EU or from third countries (such as the U.S. or the U.K.).

Purchasing Goods from Another EU Member State

When a Czech VAT payer purchases goods from a supplier in another EU member state, the most common scenario is as follows: the Czech company places an order, the goods are physically transported from another EU country 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., apply the reverse charge mechanism within the Czech Republic.

Simply put, the Czech taxpayer calculates Czech VAT based on the value of the purchased goods in Czech crowns, reports this tax on their tax return as output VAT, and at the same time (if they meet the conditions for a deduction) claims the same amount as an input VAT deduction.

The VAT Act also precisely specifies when the obligation to report this VAT arises. As a general rule, when goods are acquired from the EU , the taxpayer is required to report the tax either by the 15th day of the month following the month in which the goods were acquired or by the date the tax invoice is issued —whichever occurs first. In practice, this means you must keep track not only of the delivery date but also of the invoice date to ensure you report the VAT in the correct tax period.

For a Czech taxpayer, the purchase of goods from the EU with full deduction entitlement is usually financially neutral —the same amount of output and input VAT appears on the return. However, this does create an administrative burden: you must correctly record the purchase of goods, calculate the tax, fill out the relevant lines on the VAT return, and often also file a summary report (if, conversely, you are the one supplying goods to the EU).

Receiving Services from Abroad

A similar principle applies to the receipt of services from abroad. Typical examples include online marketing and advertising, software licenses and the use of cloud-based tools, consulting, advisory, and professional services, various IT services— including website management and hosting—as well as other digital services provided remotely.

For most of these services, the rule applies that the place of supply is the recipient’s place of business—in our case, the Czech Republic. If you are a Czech VAT payer and purchase such a service from a foreign supplier, the supplier will generally invoice you for the amount excluding VAT. The invoice may state, for example, that the customer is responsible for paying the tax or that the “reverse charge” mechanism applies.

At this point, the self-assessment of VAT applies 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 based on this amount, report this tax on your return as output VAT, and at the same time claim the same amount as an input VAT deduction ( provided you use the service for economic activity for which you are entitled to a deduction).

The result is again a tax-neutral situation, but only provided that you are fully entitled to the deduction. For example, if you provide exempt services without the right to a deduction (typically certain financial and healthcare services, the rental of selected real estate, etc.), self-assessed VAT may represent an actual cost for you, since you cannot claim the deduction or can only do so to a limited extent.

What if you’re not a VAT payer? VAT-registered entity

Non-VAT taxpayers who purchase goods or services from abroad are a special case. Many business owners believe that as long as they are not VAT taxpayers, they do not need to deal with the tax. However, this does not apply to cross-border transactions.

If a Czech non-taxpayer purchases a service from another EU member state, they are often required to register as a so-called “VAT-identified person.”

An identified person is not a full-fledged VAT payer— they do not have a general right to claim tax credits and do not file regular VAT returns for domestic transactions. Nevertheless, they have certain obligations. They must self-assess the VAT on services or goods received from the EU, report and pay this tax via a VAT return, and at the same time, they cannot claim this tax as a deduction, precisely because they are not a traditional VAT payer.

Invoice Under the Reverse Charge Mechanism

An invoice issued under the reverse charge mechanism looks different from a standard VAT invoice. The supplier does not include VAT on such an invoice; they only state the tax base—that is, the price excluding tax—and are also required to clearly indicate that the reverse charge mechanism applies to the transaction in question. Most often, the supplier will use a phrase such as “tax paid by the customer” or“reverse charge mechanism.”

As a rule, the invoice also includes a reference to the relevant legal provisions, such as the text “reverse charge mechanism pursuant to the VAT Act.” For certain domestic transactions, the invoice may also include a transaction subject code, which is used for record-keeping purposes and to ensure correct reporting in the control report.

Transaction Subject Codes

A transaction subject code is a numerical identifier that allows a specific transaction to be accurately classified into the correct category of transactions under the reverse charge mechanism. In practice, it is primarily used when maintaining records for VAT purposes, when automatically generating data for control statements, and also in accounting and invoicing software, where, for example, you select the appropriate code—such as “construction work”—based on the software’s settings.

Historically, these codes were linked to the statutory VAT register extract; today, their role is largely taken over by the control statement, in which reverse-charge transactions are reported in specific sections of the form.

Self-Assessment of VAT—Accounting in Practice

When the term “self-assessment of VAT” is mentioned, most business owners are interested in what the accounting entry actually looks like. The reverse charge mechanism is reflected not only on the invoice and in the VAT return but also in the accounting entries—for both the supplier and the customer.

Accounting for the Supplier

A supplier providing a transaction under the reverse charge mechanism issues an invoice without VAT. In the accounting records, the supplier records only the tax base—that is, the value of the transaction excluding tax—typically, for example, with the entry 311 – Customers / revenue account (e.g., 602) and does not use account 343 – VAT at all, because they do not report output tax on this supply. In the VAT return, the seller then reports such a transaction on a separate line designated for the reverse charge mechanism, stating only the tax base, without output VAT.

Accounting for the Customer – Self-Assessment of VAT

Conversely, a customer who is a VAT payer performs the self-assessment of VAT under the reverse charge mechanism. From an accounting perspective, the process typically consists of three steps:

1. Posting the received invoice without VAT: First, the customer posts the received invoice without VAT, i.e., only the tax base. A typical journal entry might look like this: 518 – Services (or 042 – Acquisition of Fixed Assets, 131 – Purchase of Goods, 501 – Consumption of Materials, etc.) / 321 – Suppliers, limited to the amount of the tax base.
2. Self-assessment of output VAT: In the second step, the accountant performs a self-assessment of output VAT. From the tax base received, the company calculates the VAT (for example, 21% of the invoice amount) and posts this tax to account 343 – VAT (343 – Output VAT / 343 – Input VAT). This is an internal accounting entry through which the business “self-assesses” output VAT and creates a right to a deduction.
3. Claiming the Input VAT Deduction: The third step is to claim the input VAT deduction. The portion of account 343 representing input VAT is claimed as a deduction in the same tax period, provided the taxpayer is fully entitled to the deduction.

In the VAT return itself, self-assessment is reflected in that output VAT from transactions under the reverse charge mechanism is reported 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 regime, depending on the type of transaction. Input VAT will simultaneously appear on the lines designated for tax deduction claims. If the taxpayer is fully entitled to a deduction, the amounts of output and input VAT “cancel each other out” in the return, and the transaction is financially neutral from a VAT perspective.

However, if the taxpayer has a limited right to a deduction (for example, because part of their business is exempt without the right to a deduction), they will not claim the entire self-assessed VAT as a deduction, but only a proportional portion. The remaining portion of the VAT thus represents an actual expense for the taxpayer, which reduces its net income.

Reverse Charge – Practical Examples

1) Construction Work Between Czech Taxpayers

Construction Company A (a VAT payer) performs thermal insulation work on an office building for Company B (a VAT payer). Both companies are established in the Czech Republic, the property is located in the Czech Republic, and the work falls under the category of construction and installation work as defined by the VAT Act.

Reverse charge invoice: taxbase : 500,000 CZK, VAT: 0 CZK

Accounting entry for A (supplier): 311 / 602 in the amount of 500,000 CZK, with no output VAT recorded

Accounting for B (customer):

• invoice received: 042 / 321 – 500,000 CZK
• Self-assessment: internal document, VAT calculation at 21% = 105,000 CZK, 343 – output VAT / 343 – input VAT 105,000 CZK
• In B’s VAT return, B will report: 105,000 CZK as output VAT in the line for domestic reverse charge and 105,000 CZK as a deduction claim (if fully eligible)

In total, B will pay 0 CZK to the government if it has a full right to a deduction. For B, the reverse charge mechanism is tax-neutral, but it must not forget to report it correctly in the tax return and the control report.

2) Service from the EU – online marketing from a Slovak agency

A Czech VAT payer orders an online marketing service from a Slovak agency—a VAT payer. According to Czech VAT rules, the place of supply is in the Czech Republic (the recipient’s registered office). The Slovak supplier issues an invoice without Slovak VAT under the reverse charge mechanism.

Invoice: taxbase : 50,000 CZK (converted to CZK), VAT: 0

Czech customer:

• records an expense of 518 / 321 in the amount of 50,000 CZK
• calculates 21% VAT = 10,500 CZK
• performs self-assessment: 343 – output VAT / 343 – input VAT 10,500 CZK
• reports in the tax return: output tax on the line for services received from another Member State and a concurrent right to input tax deduction

Again, this is a case of self-assessment of VAT, where the customer formally pays the VAT.

3) Purchase of cell phones over 100,000 CZK between Czech taxpayers

A Czech electronics wholesaler (VAT payer) sells mobile phones worth 300,000 CZK to another Czech VAT payer. The goods fall into a category where the reverse charge mechanism applies in the Czech Republic when the value threshold (100,000 CZK excluding VAT) is exceeded.

Invoice: taxbase : 300,000 CZK, VAT: 0 CZK

The supplier invoices only the tax base; the customer self-assesses the VAT (21% of 300,000 CZK). In the VAT return, the reverse charge is reported on special lines for the supply of selected goods, as specified in the annex to the law.

Summary

The reverse charge is a special VAT regime under which the obligation to declare tax is transferred from the supplier to the customer. In the Czech Republic, it is used only for supplies defined by law and subject to specific conditions; however, it also plays a significant role in cross-border transactions. The supplier generally issues an invoice without VAT listed, stating that the customer is responsible for paying the tax, while the customer self-assesses the tax. If the customer is fully entitled to a tax credit, the regime is typically financially neutral for them. However, it is essential to correctly determine whether the reverse charge mechanism actually applies to a specific transaction, as an error can lead to corrections to tax documents and tax returns, as well as potential penalties.