2018 EU Generalised Reverse Charge VAT Mechanism

To help combat the stubborn challenge of ‘missing trader’ or carousel fraud’, the EU provided member states with the option to introduce a generalised reverse-charge mechanism (GRCM) on a temporary basis under strict rules. It is part of the EU Action Plan for VAT and other reforms.

This is designed to help eliminate some of the VAT fraud estimated to cost member states €50 billion per annum in lost collections.

At the time of agreement on the measure, in December 2018, the GRCM was viewed as a short-term anti-avoidance solution until the EU was able to agree and implement its planned Definitive VAT System (see above) in 2022.

No enactments to date

The Czech Republic is the only EU member state to have applied and been granted approval to launch the measure. This was set by the European Commission to start January 2020 until 30 June 2022.  However, the Czech Republic has missed the launch date target, and it is unclear when it will implement the measure.

GRCM to tackle domestic VAT fraud

The GRCM measure eliminates the cash payment of VAT on all domestic B2B transactions above €17,500, and thus removes the opportunity for non-payment of the due VAT to the authorities. It follows the same treatment and reporting as the existing domestic reverse charge mechanism member states may apply, with EU Commission approval, on a defined range of fraud-sensitive sectors (Article 199a of Directive 2006/112/EC).

On agreeing to GRCM variation from the EU VAT Directive in 2018, many states, especially France, objected to the principle of disrupting a core feature of the VAT regime: the fractional cash payment of VAT through the production chain. They feared fraudsters would simply migrate to neighbouring countries and find other routes to exploit the tax system. As a result, a number of technical restrictions where introduced for member states applying to introduce the GRCM:

• Member states must first seek approval from the European Commission and Council prior to introducing the measure;
• It will only apply to sales of domestic goods and services above €17,500;
• The measure is only scheduled to be available up until 30 June 2022, after which time the member states will evaluate the effects and report back to the Commission;
• The VAT Gap (the difference between the VAT revenue expected and that collected) of the applicant state must be at least 5 percentage points about the EU median –10.1% for 2017; and
• Effective electronic reporting system will need to be established for all taxable persons, particularly those that will be subject to the GRCM.