Reverse-charge procedure refers to a VAT procedure in which the VAT liability lies not with the supplying entrepreneur but with the recipient of the supply or service. In Germany the legal basis is predominantly anchored in § 13b of the German VAT Act (UStG). For freelancers and owners of small businesses this means in practice: for certain supplies or services no VAT is shown on the supplier's invoice; instead the recipient must record the VAT in their accounting as a tax payable and at the same time — if entitled to deduct input tax — as input VAT.
Legal basis and typical use cases
The reverse-charge procedure is regulated in Germany mainly by § 13b UStG. Typical cases in which the procedure applies include:
- Construction and installation services as well as related ancillary services (common in the construction sector and in subcontractor chains).
- Deliveries of certain categories of goods (e.g. scrap, certain metals) and trading in specific goods under resale or trading conditions.
- Intra-community supplies of services or services from abroad to German taxable persons (B2B), provided the supply is taxable in Germany and the foreign supplier does not use a German VAT ID No.
- Certain services in the waste disposal, cleaning or similar sectors, where provided for by law.
Important: Not all cross-border transactions automatically trigger reverse charge; for intra-community goods deliveries the intra-community acquisition rules instead apply. Therefore the distinction is technically relevant and should be checked carefully.
Accounting treatment and example postings
For accounting the reverse-charge procedure is recorded as follows: the recipient records the VAT on one side as a liability (VAT payable) and on the other side the same amount as input VAT (input tax), provided they are entitled to deduct input VAT. This often results in a neutral effect on cash flow, but does require correct reporting in the VAT advance return.
Example: Service to a freelancer
An external IT service provider issues an invoice to a German freelancer for EUR 1,000.00 net. The supply is subject to reverse charge.
- Invoice amount net: EUR 1,000.00
- No VAT shown on the supplier's invoice
Typical postings for the recipient (19% VAT):
| Posting | Debit | Credit |
|---|---|---|
| Service expense | EUR 1,000.00 | |
| Input VAT (19%) | EUR 190.00 | |
| VAT (19% tax payable) | EUR 190.00 |
Result: The VAT is posted as tax payable and at the same time deducted as input VAT, provided the recipient is entitled to deduction. If no input VAT deduction is possible (e.g. under the small business regulation — Kleinunternehmerregelung, or for VAT-exempt supplies), the VAT remains a cost to the recipient.
Invoice requirements, reporting and practical tips
Invoices subject to reverse charge must contain special notes. Common particulars are:
- Note on the tax liability of the recipient, e.g. “Tax liability of the recipient – § 13b UStG”.
- Net amount and a note that no VAT is shown.
- VAT ID No. of the supplier and, for intra-community supplies, where applicable the VAT ID No. of the recipient.
For reporting: reverse-charge transactions must be reported correctly in the VAT advance return and annual VAT return. Intra-community services additionally require verification of the VAT ID No. (e.g. in the EU VIES) and, where applicable, submission of an EC Sales List (Zusammenfassende Meldung).
Practical tips:
- Check the entrepreneurial status and, where applicable, the VAT ID No. of your contractual partner before commissioning work.
- Document the checks (copy of the VAT ID No., contract, service description) to reduce liability risks.
- If unsure, consult a tax advisor, especially for cross-border matters or builder/developer models.
- Ensure correct invoice wording to avoid queries from the tax office.
Special cases and consequences of incorrect treatment
If reverse-charge rules apply and are handled incorrectly, additional tax assessments, late-payment penalties and possibly fines may result. Typical errors include incorrectly showing VAT on the invoice or failing to record the tax payable.
Particular attention is required for complex sectors such as construction, trade in certain goods or international services. In case of doubt a case-by-case review by a tax advisor or an audit by the tax office is recommended.
Conclusion: The reverse-charge procedure shifts the VAT liability from the supplier to the recipient. For freelancers and small businesses this primarily means careful invoice review, accurate bookkeeping and timely reporting in the VAT return to avoid financial disadvantages.