United States

Proposed EU VAT accounting changes to combat VAT fraud

European Commission extends reverse charge rule on a temporary basis


On December 21, 2016, the European Commission released a proposal to allow qualifying Member States to implement a general domestic reverse charge covering both supplies of goods and services.

The motive behind this is to address the growing problem with VAT fraud and start to reduce the VAT gap which is estimated at €160billion across the EU.

The benefit of a reverse charge is that the recipient of a supply self-assesses VAT, thereby avoiding the need for a supplier to collect and remit VAT charges.  In a fraudulent structure a supplier would collect the VAT, but not remit it to a tax authority (this includes carousel fraud).  By extending the reverse charge rule the VAT liability is more effectively controlled at one location.

The proposal for a Generalized Reverse Charge Mechanism (GRCM) departs from the normal VAT rule that a supplier should charge and collect VAT.  Although there are discrete examples of transactions that are controlled through the reverse charge, what the European Commission is proposing would apply to all transactions.  This is being proposed as a temporary measure and only for Member States that meet certain criteria.

The proposal is that the GRCM would only be available until June 30, 2022 and only by Member States that meet certain criteria and have satisfied the European Commission by application.

The measure would apply to all transactions with an invoice value above €10,000.  The supplier would not charge VAT on these invoices, but would continue to charge VAT as appropriate on its other supplies.

Although there is no immediate action required, any business that becomes affected by this change will need to introduce additional accounting measures and controls in order to comply with the changes.  These will likely require reconfiguration of accounting system logic.



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