Reverse Charge Mechanism (RCM)
Reverse charge is a mechanism under which VAT is required to be paid for the goods or services by the recipient instead of the supplier when the supplier is not a resident in the member state where the supply takes place.
When the reverse charge is applied, the recipient of the goods or services makes the declaration of both their purchase (input VAT) and the supplier’s sale (output VAT) in their VAT return. In this way the two entries cancel each other from a cash payment perspective in the same return.
In relation to standard VAT, the customer A in UAE buys AED 1,000 worth of goods from supplier B in UAE. The supplier charges 5% VAT on AED 1,000 and pays the VAT to Government.
In case of reverse charge, the supplier C is overseas and sells AED 1000 worth of goods to customer A. The customer A does not pay VAT to supplier C. The customer A pays VAT of 5% directly to Government.