Did you know? Over 170 countries worldwide have implemented VAT or GST.
Despite how common VAT is, the tax is difficult at the best of times to understand. Knowing who pays VAT – the buyer or the seller – is straightforward, though, if you take the time to learn about the tax or have help.
That’s why we share plenty of knowledge on the topic, from an in-depth introduction to EU VAT to how VAT changes when trading between different EU countries.
With this specific blog, we explain who collects VAT and what governments expect of businesses. For questions around the EU VAT eCommerce package read this comprehensive guide.
How VAT works – a quick explanation
Let’s start with the burning question, what is VAT?
VAT is a tax collected as goods and services move through a supply chain. In other words, manufacturers, distributors and retailers collect VAT as an item or service makes its way to a final consumer.
But wait. What’s GST?
Similar to VAT, GST sees tax authorities levy GST (Goods and Services Tax) on goods and services sold for domestic consumption. Consumers pay GST, and businesses remit it to the government.
Both GST and VAT share characteristics but have different names. How they work depends on the country and local legislation. For example, the EU has specific VAT compliance requirements as our free guide outlines.
Who pays VAT, the buyer or seller?
Let’s start with a seller. Sellers collect VAT by adding the tax to the selling price.
The VAT charged by the seller is ‘output tax’. Sellers report this to the local tax authority on behalf of the buyer. The VAT paid by the buyer is ‘input tax’. The buyer can credit this against the VAT they charge.
Yes, we know this sounds complicated so here’s the concept in simpler terms.
- Both buyers and sellers can collect VAT
- If you are in a supply chain, you collect the tax on behalf of the government
- Essentially, any collected VAT is not yours to spend – your business is essentially a custodian
- The consumer at the end of the supply chain is who ultimately pays the tax
In certain scenarios, VAT can be instead reported and remitted by the buyer. This is a ‘reverse charge’.
Differences between Sales Tax and VAT
The main differences between Sales Tax and VAT are who pays tax to the local governments and when.
VAT and Sales Tax occur at different stages in the production chain. As a tax authority, you levy Sales Tax on retail purchases of goods or services. You impose VAT on each step of the production process.
The challenge with Sales Tax is that tax authorities have no record of transactions to verify retailers’ tax payments. However, with VAT, the chain of transactions and credits creates a natural audit trail due to the cross-reporting between businesses.
The government can issue fines if tax authorities detect errors through an audit.
How does VAT work?
Usually, VAT is charged at the same flat rate across the board. This is set by a national government. However, other rates – such as a zero rate – can apply to specific supplies like children’s clothes and food.
Supplies such as financial and property transactions can also be exempt from VAT – in which case, no VAT is chargeable, nor can the related VAT be recovered by businesses.
The seller should issue a valid VAT invoice containing the following:
- Invoice number
- Date
- VAT number
- Addresses of both the buyer and seller
- Price with the VAT stated separately
Local legislation defines whether additional information is required. Simplified and retailer invoices are allowed in some circumstances.
VAT encourages everyone in the production chain to maintain documentation for all transactions, making each subject accountable for their amount of revenue and compliance with tax laws.
This becomes particularly important when a business wants to reclaim VAT, as they will be required to produce evidence that the tax was incurred in the first place.
Responsibilities as a VAT registered business
Businesses will document and report the VAT paid to their suppliers and the VAT collected on their sales. To claim a VAT credit, businesses must keep proof of the VAT incurred, such as purchase invoices and import documents.
Not all businesses may need to register for VAT. Some circumstances may trigger a VAT registration. These include:
- The presence of a permanent establishment in a certain country
- Exceeding registration thresholds
- Specific activities like importing goods into a country
In certain circumstances, it’s possible to register for VAT voluntarily, with the main benefit being the ability to recover the input VAT incurred on purchases.
Registered businesses file periodic VAT returns in respect of each prescribed accounting period. The format and frequency may vary from country to country.
Registered businesses also keep VAT records, charge the right amount of VAT to their supplies, submit VAT returns, and pay any VAT due in a timely manner.
What triggers the tax administration requirement?
There are specific triggers that could prompt queries from the tax office. Usually, these are changes in the company’s status – such as a new registration, a de-registration, or structural changes. VAT refund requests also fall into this category.
Due to their structure and business model, certain businesses are naturally subject to audits. Groups commonly selected for scrutiny include large companies, exporters, retailers, and dealers in high-volume goods.
Tax authorities, especially those trading with the European Union, often identify individual taxpayers based on past compliance and how their information compares with specific risk parameters.
Therefore, unusual trading patterns, discrepancies between input and output VAT reported, and many refund requests may appear unusual from the tax office and produce questions.
Finally, another common reason for the tax authorities to request further information from taxpayers is the so-called “cross-check of activities”. In this case, the tax office will contact their counterparts to verify that the information provided is consistent on both sides.
Whether a business decides to handle the audit in-house or request the support of an external advisor, it is essential to consider the consequences of the audit – especially if high amounts of recoverable VAT are at stake. In the case of an audit, the main objective should be a successful and fast resolution to limit any detrimental impact on the business.
Our explanation about who pays VAT, the buyer or the seller, has explained things but do ask our experienced team any extra questions you might have. They are here to help.
Frequently Asked Questions
Is VAT paid by the seller or buyer?
A seller collects VAT from sales and reports it to the local tax authority on behalf of the buyer. A buyer may also end up charging VAT if it is selling its own goods or services.
Does the buyer pay VAT?
Yes, a buyer pays VAT to sellers and if a buyer sells goods or services to its own customer base and meets the threshold for VAT registration, it will charge VAT itself and pay this to the government.
Do sellers pay VAT?
Sellers do pay VAT, as it’s a consumption tax involved in every step of the supply chain.
Who pays VAT, the buyer or seller in the UK?
This depends on the transaction, where the buyer or seller sits in the transaction supply chain, and whether the goods are exempt from VAT.
What is the difference between Sales Tax and VAT?
Sales Tax is different to VAT. The consumer only pays Sales Tax when buying the final product, whereas businesses collect VAT at every stage of production – meaning all purchasers pay VAT.
Do you need help with VAT?
Speak to our sales team to find the right solution for you.
