In general, when a business liable for value-added tax (VAT) sells a product or provides a service to a customer, it is required to invoice the sale inclusive of all taxes, collect the VAT from the customer and pay it to the tax office at the time of declaration. However, there is an exception to this rule: the VAT reverse charge. Here's what you need to know about the reverse charge – what it is, how it works and the obligations of the parties involved.

What's in this article?

• What is the VAT reverse charge?
  
• Who can use the VAT reverse charge?
  
• What is the purpose of the VAT reverse charge and what are its benefits?
  
• The import VAT reverse charge
  
• The VAT reverse charge in the construction sector
  

What is the VAT reverse charge?

The VAT reverse charge makes a customer liable for VAT. It is then up to the customer – not the business making the sale – to declare and pay this tax. This mechanism therefore reverses the VAT roles: the selling business invoices for the service or product purchased net of tax, and the customer pays the VAT on the purchase directly to the tax office.

Who can use the VAT reverse charge?

The reverse charge applies to businesses established abroad that trade with French businesses. It also applies to VAT-liable subcontractors in the construction sector.

The mechanism also applies to the following domestic operations:

• Supplies and services involving fresh industrial waste
  
• Supplies of natural gas and electricity
  
• Intragroup deliveries
  
• Electronic communications between taxable persons in France
  

What is the purpose of the VAT reverse charge and what are its benefits?

The reverse charge may seem complex, but its main purpose is to simplify tax and administrative procedures for businesses established outside France and for subcontractors in the construction sector. The reverse charge for domestic operations is designed to reduce tax evasion.

This means that foreign businesses carrying out import operations are not required to register in France. Similarly, subcontractors in the construction sector are also exempt from VAT. It is up to the business employing them to collect and remit the VAT to the tax office.

The import VAT reverse charge

The reverse charge mechanism applies to both intracommunity imports and imports from countries outside the European Union. Since 1 January 2022, import VAT has been automatically and compulsorily reverse-charged (instead of being declared).

Obligations and how it works

The foreign vendor is required to charge for shipping net of tax and to add the words "autoliquidation" ("reverse charge") to the invoice to indicate that the French customer will pay import VAT. The intracommunity VAT number of both businesses must be stated on the invoice.

The VAT is then collected and deducted by the French business when filing its VAT declaration to customs – without any cash advance. Import VAT is declared and paid using form 3310-CA3-SD (also known as the monthly or quarterly CA3).

The French business must indicate the amount of the reverse-charged transaction net of tax on line B4 of section A, entitled "Purchases of goods or services from a taxable person not established in France". It will then pay the total VAT due to the tax office.

Note that business customers subject to the VAT-exempt scheme who wish to import goods into France must have an intracommunity VAT number at the time of importation to be able to reverse-charge the VAT.

The VAT reverse charge in the construction sector

In the case of subcontracting in the construction sector, the contractor (i.e. the construction business that has signed a contract with the end customer) employs a subcontractor to carry out part of the work.

The subcontractor's VAT reverse charge applies to the following types of work:

• The renovation or construction of buildings carried out by different trades
  
• Civil engineering or public works
  
• The furnishing of buildings, such as installation of movable goods (built-in appliances, pipes, etc.)
  
• Repairs, renovation work and servicing
  
• Post-construction cleaning
  

Obligations and how it works

The link between the subcontractor and the business employing it must be clearly established in the quote, the signed purchase order or the contract. It is key that the subcontractor invoices for its services net of tax and indicates the VAT reverse charge on the invoice. When filing its VAT declaration, the subcontractor must indicate the amount of the work carried out net of tax on form 3310-CA3-SD or 3517-S-SD (depending on the type of taxation chosen) on the line "Other non-taxable operations".

The contractor must reverse-charge the VAT to the tax office. The reverse charge is applied in the VAT declaration by completing form 3310-CA3-SD or 3517-S-SD. On the line "Other taxable operations", the business must enter the amount of the subcontractor's services net of tax.

The contractor must also charge the VAT to the end customer. If the reverse charge is not applied, the business will be fined 5% of the total VAT due. However, if the subcontractor qualifies for the VAT-exempt scheme, the business is exempt from paying VAT to the tax office.

Tax complexity can be costly for businesses. Refer to this article if in doubt, or use an advanced tool such as Stripe Tax to simplify your tax procedures from start to finish. Stripe speeds up the completion and submission of all your VAT declarations with a single integration – no code required. To get started with Stripe or to find out more, contact one of our experts.