In practice, a reverse charge simplifies VAT payments (at least on part of the supplier) and reduces the corresponding bureaucratic costs. The European Union created this fiscal concept to act against violations such as tax fraud within the European Single Market. Since its implementation into the EU value added tax system reform of 1993, it has been especially successful in combatting so-called “missing trader schemes,” whereby tax-free, cross-border shipments are used to evade VAT payments. It is estimated that several billion euros are lost per year by this method.
Example: Goods are imported from the United States to France, where entrepreneur A acquires and subsequently passes them on to entrepreneur B in Great Britain. Entrepreneur A issues an invoice without including VAT figures. Entrepreneur B sells the goods from entrepreneur A to entrepreneur C in Great Britain. This time, however, entrepreneur B issues an invoice with relevant VAT figures. The VAT is refunded to entrepreneur C by the revenue office in the form of an input tax. However, instead of paying the VAT to the revenue office, entrepreneur B disappears from the market before the tax is due. From that point on, he is referred to as a “missing trader.” Entrepreneur C then sells the goods back to entrepreneur A and the entire process is repeated.
Despite the fact that suppliers do not settle VAT payments in cases of missing trader frauds, they are nevertheless claimed by beneficiaries in the form of input taxes. The reverse charge mechanism prevents such situations by keeping all VAT and input taxes under one roof. If the recipient wants to receive a refund in the form of input tax from the revenue office, he must also clearly specify the VAT included in the invoice. Since reverse charges make tax systems less susceptible to fraud, many European industries nowadays see this procedure as a mandatory part of any transaction. In the past, the construction industry and the suppliers of tablets and mobile phones were very common targets for such fraudulent operations.