Netherlands - Customer’s identity required to apply reverse charge

The Dutch Supreme Court recently issued a decision that clarifies the obligations relating to the application of the VAT reverse charge mechanism. Specifically, the court has ruled that the customer’s identity must be known in order to apply the reverse charge.

The reverse charge is an indirect tax mechanism under which responsibility for paying VAT due to the tax authorities is shifted from the supplier to the customer. The reverse charge applies only in B2B transactions—it does not apply in B2C transactions (primarily because individual consumers do not have a VAT ID number). The reverse charge simplifies the VAT compliance burden, helps prevent VAT fraud and makes certain that VAT is paid.

The reverse charge is mandatory for certain supplies and services in the Netherlands. When a supplier wants to apply the reverse charge, it will issue an invoice without VAT and indicate on the invoice that the reverse charge is being applied. The customer then calculates and pays the VAT due to the tax authorities.

Facts of the case

The case before the Supreme Court involved a Dutch entrepreneur that supplied non-ferrous metals to a German entrepreneur. Before making the first delivery, the entrepreneur checked the customer’s German VAT ID number, which was invalid. The Dutch entrepreneur still decided to supply the goods and issued an invoice to the customer with VAT reverse charged. The customer picked up the goods and paid cash. Despite making repeated requests to the customer for a valid VAT ID number, it was never disclosed to the Dutch entrepreneur.

The Dutch tax authorities took the position that the person who made contact with the metal seller acted as a straw man, the actual customer was unknown and it was not possible to ascertain whether that customer declared VAT in Germany. As a result, the tax authorities believed that the reverse charge could not be applied because the customer’s identity was undetermined. The Dutch entrepreneur disagreed and brought the case before the Supreme Court.

Decision of the Supreme Court

The Supreme Court sided with the tax authorities, holding that the VAT reverse charge can be applied only if the tax authorities are able to determine the actual identity of the customer to whom liability for paying VAT is shifted. The court stated that knowledge of the customer's identity is necessary for the tax authorities to properly administer and control the levying and collection of VAT from the customer.

Practical impact of the decision

Entrepreneurs cannot be denied the application of the reverse charge if they inadvertently use an invalid or incorrect VAT ID number on an invoice when applying the reverse charge, but entrepreneurs still have to carefully investigate to whom they are making a supply. However, if the customer’s identity remains unknown, the reverse charge may not be applied. This principle applies regardless of the size of the supply of goods; even though, normally, only an entrepreneur would purchase a large quantity, a seller cannot presume that it is making a supply to an entrepreneur to whom VAT liability is shifted.

As mentioned above, application of the reverse charge is mandatory in specific cases and making certain that it is applied correctly is important for both the supplier and the customer. If a supplier forgets to apply the reverse charge and incorrectly mentions VAT on the invoice that it also pays to the tax authorities, the tax authorities generally will not charge VAT to the customer. If the supplier is unable to pay the VAT (e.g., due to cash-flow issues) in this instance, the authorities will look to the customer for the VAT due. VAT-registered customers that receive an invoice that does not reference the application of the reverse charge should not deduct and pay the VAT on the invoice but instead ask the supplier to issue a corrected invoice.

Although the Supreme Court does not make it mandatory for the seller to have the VAT ID number of its customer, having this number is a good practice and should help minimise the possibility of questions raised by the tax authorities. However, having a VAT ID number on its own is not enough in the Netherlands—the identity of the customer also is required.

Madeleine Merkx
Maxime Leenders
BDO in Netherlands

Subscribe to receive the latest BDO News and Insights



Please fill out the following form to access the download.