Reverse charge, OSS and the invoice line nobody reads

Software vendors get VAT wrong in a predictable way: they pick one treatment when they start selling and apply it to every invoice thereafter. It works until the first audit, or until a German finance department refuses to pay an invoice that is missing a required line.

B2B inside the EU: reverse charge

Selling a subscription or development services to a business in another EU member state, the place of supply moves to the customer. You do not charge VAT; the customer accounts for it in their own country. Two conditions: you validate the customer’s VAT number in VIES and keep the evidence, and the invoice says so explicitly.

The invoice needs your VAT number, the customer’s VAT number, and a statement that the reverse charge applies — conventionally “VAT reverse charge, Article 196 of Directive 2006/112/EC”. An invoice with a zero VAT line and no explanation is the one that gets returned.

B2C inside the EU: one-stop shop

Selling to consumers is the opposite. The place of supply is where the consumer lives, and you charge that country’s rate — twenty-seven possible rates rather than one. The One Stop Shop lets you register in a single member state and file one quarterly return covering the whole EU, rather than registering in each country.

There is a small-volume threshold of €10,000 a year across all cross-border B2C sales, below which you can keep charging your home rate. Most vendors with any consumer traction pass it in the first year and are better off registering for OSS before they do.

Selling into the EU from outside

A non-EU vendor selling digital services to EU consumers registers for the non-Union OSS scheme in one member state and charges local rates. For B2B sales to EU businesses, the reverse charge does the work and no EU registration is needed for VAT purposes — though GDPR may still require an EU representative under Article 27, which is a separate question with a separate answer.

What to put in the contract

One clause, three sentences: fees are exclusive of VAT; where the reverse charge applies the customer accounts for VAT in its own jurisdiction and will provide a valid VAT number; where withholding tax is imposed on the fees, the amount payable is grossed up so the vendor receives the agreed sum. The third sentence is the one that gets omitted and the one that costs money, most often on contracts with customers outside the EU.