How does reverse charge VAT work?

Reverse charge VAT is a mechanism used primarily in situations where the buyer, rather than the seller, is responsible for reporting and paying the Value Added Tax (VAT) on a transaction. This system is particularly common in cross-border transactions and specific domestic scenarios where goods or services are provided.

When reverse charge VAT applies, the seller does not charge VAT on their invoice, which simplifies the seller's VAT obligations and reduces the administrative burden. Instead, the buyer accounts for the VAT at the applicable rate. This means that the buyer must record both the output tax (the VAT they would charge if they were the seller) and the input tax (the VAT they can reclaim) on their VAT return. In practice, this can result in no net VAT payable if the buyer is entitled to reclaim the tax.

This mechanism is designed to prevent tax fraud and ensure that the VAT system is not exploited, especially in cross-border scenarios where enforcing tax compliance can be challenging. The other options do not accurately describe the reverse charge VAT process: it does not apply only to local transactions, it is not a method to avoid VAT entirely, and in fact, it ensures that VAT is accounted for correctly by shifting the responsibility from the seller to the buyer in certain circumstances.