Czech Republic VAT generalised reverse charge EC approval

The Czech Republic has been given the greenlight from the EU’s European Commission to introduce the generalised reverse charge on all domestic transactions above €17,500. The measure, if approved by the EU Council, will come into effect on 1 January 2020 for two and a half years. It will then be assessed for impact and benefits.

The general reverse charge mechanism effectively withdraws the VAT cash payment from a transaction in an effort to eliminate the opportunity for fraud. The seller does not charge VAT; instead, the purchasers reports the sale through their own VAT return without any cash payment ('reverse charge'). Up until now, it has only been permitted as a derogation from the EU VAT Directive in sectors vulnerable to VAT fraud, including: laptops; computer chips; mobile phones; carbon credits; precious metals; and other commodities.

The Czech Republic had long campaigned for the derogation from the EU VAT Directive to help fight missing trader fraud. This accounts for up to €50billion a year of the EU VAT Gap, the difference between anticipated VAT revenues and actual receipts. The EU member states finally conceded at the end of 2018. The measure may only be granted to member states with a VAT gap of more than 5% of the EU’s median, of which at least 25% must be accounted for by missing trader / carousel fraud.

A number of countries, including France, where against the measure as it could undermine a core concept of the EU VAT regime, VAT charged and collected throughout the production chain. Also, it may simply encourage criminal gangs to move to other EU member states that have not opted to adopt the mechanism.