If you hire contractors across the EU, VAT is one of those topics that's easy to get vaguely right and surprisingly easy to get precisely wrong. A contractor in another member state sends an invoice, and you're left wondering: should there be VAT on it, who accounts for it, and what do your records need to show? This guide gives a clear, practical overview for European startups working with cross-border contractors.
One thing up front: this is general guidance, not tax advice. VAT rules are detailed, they vary by country and by the nature of the service, and they change. Treat what follows as a map of the terrain, then confirm the specifics with a qualified accountant before you rely on any treatment.
VAT basics for contractors
VAT (Value Added Tax) is a consumption tax charged on most goods and services across the EU. A contractor who is VAT-registered normally adds VAT to their invoices and pays it to their tax authority; the business receiving the invoice can often reclaim that VAT as input tax, subject to the usual rules. The net effect is that VAT is designed to be neutral for businesses and ultimately borne by the final consumer.
Two facts shape almost every contractor scenario:
- Whether the contractor is VAT-registered. Small contractors below a national threshold may not be registered and may not charge VAT at all.
- Where each party belongs. Domestic, cross-border within the EU, or outside the EU each follows different rules, especially for services.
For most startups, the contractors that matter are providing services (development, design, marketing, consulting) rather than goods, so the rest of this guide focuses there.
The reverse charge for cross-border B2B services
Here's the mechanism that trips people up most. When a VAT-registered business in one EU country buys services from a VAT-registered business (including a sole-trader contractor) in another EU country, the general B2B rule places the supply where the customer belongs, and VAT is usually handled by the reverse charge.
In practice, reverse charge means the contractor invoices you without charging VAT, and you, the customer, account for the VAT in your own country. You record the VAT due on your return and, where you have full recovery, reclaim the same amount as input VAT, so it nets to zero, but it must still appear on your return.
What that looks like on the invoice
A correct cross-border reverse-charge invoice typically shows:
- No VAT amount charged.
- Both parties' VAT identification numbers, including yours.
- A note such as 'Reverse charge' indicating the customer accounts for VAT.
If a contractor in another member state charges you their local VAT on a standard B2B service, that's often a red flag worth querying, the reverse charge usually applies instead. Your accountant can confirm which treatment is correct for the specific service.
Reverse charge doesn't make VAT disappear, it moves the responsibility for accounting for it from the supplier to you.
Validate the VAT number
Because reverse charge depends on both parties being valid taxable persons, it's good practice to validate a contractor's VAT number via the EU's VIES system before treating a supply as reverse-charge. Keep a note that you checked.
What a valid contractor invoice needs
Whatever the VAT treatment, an invoice has to stand up as a record. The exact requirements are set in national law, but a contractor invoice in the EU generally needs to include:
- A unique invoice number and the date of issue.
- The supplier's full name, address and VAT number (where registered).
- The customer's name, address and, for reverse charge, VAT number.
- A clear description of the services and the date or period supplied.
- The net amount, any VAT rate and amount, and the total.
- For cross-border B2B services, the reverse-charge note.
If a contractor isn't VAT-registered, their invoice won't show VAT and should make that clear; that's normal for smaller suppliers and doesn't make the invoice invalid.
Record-keeping that keeps you safe
VAT compliance lives or dies on records. Tax authorities expect you to keep invoices and supporting documentation for a number of years (commonly several, set by national law), in a form you can produce on request. Sensible habits:
- Keep every invoice, incoming and outgoing, with the VAT treatment legible on its face.
- Log VAT-number checks for reverse-charge suppliers, with the date.
- Tie payments to invoices so each outflow maps to a documented obligation.
- Separate operational card spend from contractor fees, so your records don't blur the two.
That last point is where your payment setup helps. If contractor fees go out as clean SEPA transfers and operational spend runs on dedicated cards, the paper trail stays tidy. Using a single euro balance with per-purpose contractor and payroll cards means each card's CSV export is already sorted, which makes reconciling against invoices far less painful at filing time.
Status matters too: contractor vs employee
VAT treatment assumes you're genuinely dealing with an independent business. If a 'contractor' is in substance an employee, different rules apply, and not just for VAT but for payroll taxes and social contributions, which no amount of invoicing fixes. Misclassification is a real and growing enforcement area across the EU.
Before you settle into a VAT routine with someone, it's worth checking the relationship is what the invoice implies. Our guide to contractor vs employee status in the EU walks through the factors that distinguish the two, and why getting it wrong is costly.
When to bring in an accountant
Some situations genuinely need professional input rather than a rule of thumb:
- Contractors outside the EU, where place-of-supply and import rules differ again.
- Services with special VAT treatment (certain digital, financial or land-related services).
- Mixed supplies, or any case where you're unsure whether reverse charge applies.
- Your own VAT recovery position, if you make exempt or partly exempt supplies.
A good accountant will set up the correct treatment once and save you far more than they cost in penalties and rework avoided. Use this guide to ask sharper questions, not to replace that advice.
Get the basics right, invoices that show the correct VAT treatment, reverse charge applied properly on cross-border B2B services, validated VAT numbers, and clean records, and contractor VAT becomes routine. Keep your payments organised alongside it, and filing season stops being a scramble. To equip and pay your EU contractors from one euro balance, you can request early access from the payroll cards page.