Further to the Czech Republic being the only Member State to date to make an application to apply the domestic generalized reverse charge mechanism (GRCM), the Commission has recently published a proposal authorising it to use this system. This is in response to the request made by the Czech Republic in March 2019.
EU legislation introduced the GCRM at the end of 2018 for Member States severely affected by VAT carousel or missing trader fraud. The aim was that the GRCM would to apply to certain domestic business-to-business transactions where fraud was likely to occur.
The temporary measure works by effectively eliminating cash payments of VAT on identified domestic supplies of goods and services with a value above EUR 17,500 per transaction. Instead, the liability to account for the VAT is shifted to the customer who can also deduct the VAT due on the supply as an input. When that taxpayer can recover the VAT then the effect is that no tax is payable to the tax authorities. Therefore, the possibility of evading payment of owed VAT is effectively removed.
In order to qualify for application of the scheme, the Czech Republic had to prove that its VAT gap, that is, the difference between its expected VAT revenues and VAT actually collected, was greater than the EU median by at least 5%; and, that at least 25% of its VAT gap was due to carousel fraud alone. It managed to do this and also evidenced that the country had introduced a number of anti-fraud measures (such as joint and several liability, optional split payments and the sectorial reverse charge mechanism) which were still not sufficient to tackle VAT fraud.
The proposal, if accepted, will be applicable between 1st January 2020 and 30th June 2022. Those impacted businesses will have to make changes in order to account for the VAT correctly from that moment in time.