The reverse charge mechanism is a special VAT rule. Where it applies, the seller or service provider must issue an outgoing invoice without showing VAT. The buyer or recipient of the service is then responsible for accounting for VAT on the invoice received.
The reverse charge mechanism is most commonly encountered in intra-Community supplies of goods and services. However, it also applies to subcontractors in the construction sector, (subcontracts) or for various construction services relating to buildings.
The procedure can only be applied if the purchaser or recipient of the service can integrate the VAT. This means that it always applies to business transactions between VAT-registered entities. This special rule therefore does not apply to invoices issued to private individuals.
Invoices are issued without showing VAT. In addition, the relevant reference must be indicated according to the service provided. The most common ones are as follows:
| Business transaction | Legal reference |
|---|---|
| Intra-Community supply of goods | Reverse charge – non-taxable turnover in accordance with Art. 41, G.D. 331/1993 |
| Intra-Community service | Reverse charge – non-taxable transaction pursuant to Art. 7-ter DPR 633/1972 |
| Subcontractors in the construction industry | Reverse charge pursuant to Art. 17, para. 6, letter a, DPR 633/1972 |
| Services provided on buildings | Reverse charge pursuant to Art. 17, para. 6, letter a-ter, DPR 633/1972 |
Upon receipt of an incoming invoice under the reverse charge mechanism, the invoice recipient is considered the tax debtor and, as already mentioned, must include VAT on the invoice amount.
The reverse charge mechanism is implemented through the double accounting entry of the invoice. By recording the received invoice both in the purchase invoice register and in the sales invoice register, the result is neutral if the VAT is deductible.