Nearly every major economy has a form of VAT. That’s 165 countries, each with its own compliance and reporting rules. The main exception is the United States. VAT is by far the most significant indirect tax for nearly all the world’s countries. Globally VAT contributes more than 30% of all government revenue.

Levying VAT is a term used to describe when a company collects VAT on behalf of a tax authority. This happens at each stage in a supply chain when a taxable event occurs. A country’s tax rules define what a taxable event is.

In a nutshell, VAT essentially turns private companies into tax collectors.

How VAT works

VAT is due on nearly all goods and services. This is up to, and including, the final sale to a consumer – that’s you and me.

Applied correctly, VAT should be cost neutral for most businesses. Companies collect VAT from their suppliers, then pay this money to the government. In the UK, this is normally every three months.

As a business this means:

Companies can reclaim the VAT on some of their purchases. When applicable, this means your business pays less VAT when its VAT return is due.

Essentially, this encourages businesses to spend and help an economy grow.

Another thing a company can do is postpone its VAT accounting. There are different reasons why this is allowed, for example, in relation to import VAT.

We know VAT isn’t easy. Speak to one of our tax experts today about overcoming your VAT compliance headaches.

VAT returns

So what is a VAT return?

A VAT return is a document listing all the VAT you have collected and what you are reclaiming VAT on along with various other information on sales and purchases in the period.

Submitting VAT returns is a legal requirement in most countries. The format and frequency vary around the EU, so it’s essential to keep

In addition to VAT returns, businesses might have to submit other declarations. This depends on the company’s trading activity and the requirements in the Member State of registration. This could include or . These can be quite complicated, as we explain here.

Understanding your VAT obligations also requires mapping a supply chain for the country of registration.

The following information applies to larger businesses or businesses selling into the EU.

EU VAT can be overwhelming and exhausting. For some relief, why not download our European VAT guide.

Sales Tax vs VAT

So, what is the difference between Sales Tax and VAT?

VAT is a broad-based consumption tax and a form of indirect taxation. It is imposed on goods and services at each stage of the supply chain, with each party paying the government the tax and passing the final cost onto the ultimate consumer.

The idea is that each party effectively only pays VAT on the value added to the product or service. This is because the party can recover the VAT on associated costs (of course, there are exceptions). One of the disadvantages is that it requires accurate accounting.

On the other hand, sales taxes are generally taxes placed on the sale or lease of goods and services.

Usually, the seller collects the tax from the purchaser at the point of sale. Sales tax is calculated by multiplying the purchase price by the applicable tax rate. The seller at a later stage transfers the tax to the responsible government agency.

How does VAT work between EU countries?

The EU VAT Directive 2006/112/EC establishes the rules for where VAT is due in the EU. Member States must implement these rules in a uniform way to avoid the possibility of double or no taxation.

How EU countries apply VAT

VAT in the EU happens when:

There’s a supply of goods – Where goods are not transported, the place of taxation is where the goods are made available to the customer. Where the goods are transported, the place of supply is where the transport starts (unless an exemption applies).

There’s a supply of services – For B2B transactions the place of taxation is generally where the customer has established their business. This applies to “intangible” services where the place of consumption cannot be determined easily.

There are certain where the place of consumption can be determined. These are:

A thing called intra-community acquisition of goods occurs – The place of taxation is the place where the transport ends (i.e., the EU country where the goods are finally located after transport from another EU country).

At the point goods are imported – The place of taxation is where goods imported from non-EU countries are generally taxed (i.e., in the EU country where they are cleared for free circulation).

Why EU countries use VAT

There are many reasons why an EU country uses VAT.

VAT can be adjusted up and down depending on how a country’s economy is performing quickly. This means a country can raise taxes quickly or support a certain sector by reducing VAT.

Once collected, the money can be spent on public services, infrastructure, healthcare and other important growth initiatives.

But wait, what about those pesky questions like “should I charge VAT to EU customers?” or “do I pay VAT if buying from Europe?”. We hear these all the time from customers who struggle with VAT rates across different EU countries.

Standard rates, reduced dates, special rates. What’s the difference?

And then you have super reduced rates and zero rates? Let’s not forget intermediary rates.

If your business is expected to charge VAT to EU customers, or you yourself are faced with paying VAT on a purchase when buying from Europe, it’s important you feel confident applying the right VAT rate each and every time.

Have a question about the many different types of VAT rates in the EU? Our tax experts are yet to receive a question that stumps them, and they will happily help unload you from this burden.

Ask them a question now.

Exempt goods and services

Sometimes companies don’t have to pay VAT. This happens when the goods or products they sell fall into an exempt category.

Some examples of exceptions include education and training, charity fundraising and insurance. Insurers instead pay a tax called (IPT).

A VAT exempt business cannot register for VAT, nor can it reclaim VAT. This is slightly different to zero-rated goods or services. In that case, VAT is charged, but at 0%. Some companies can be partly exempt too.

VAT exemptions differ country to country so it’s important to check a tax authority’s website to see whether your business needs to pay VAT. ? We love setting our clients free from their tax compliance burdens so they can focus on growing their business.

Read our comprehensive guide to VAT exempt goods and services in Europe

 

Frequently asked VAT questions:

Is VAT paid by seller or buyer?

The seller collects VAT from their buyer and pays to the relevant tax authority.

Learn more about buyer and seller VAT in our guide.

Does the buyer pay VAT?

Yes. A person or company buying a service or product pays the tax when the item is chargeable.

Do sellers pay VAT?

Sellers pay VAT on any items they purchase for their own business. The VAT they collect from their own customers is paid to HRMC. In some cases, sellers also need to self-account for the VAT due from their customers.

Who pays VAT, the buyer or seller in the UK?

VAT is 20% in the UK. A buyer pays this to the seller when they purchase an item, product or service. There are also some cases where the seller pays the VAT by way of a self-accounting mechanism.

What is the difference between sales tax and VAT?

Sales tax is found in the United States and is a tax applied at state government level on the purchase of goods or services. VAT is a consumption tax and is collected by all sellers in a supply chain, not just charged to the final consumer.

Our large advisory team can help you navigate the complexities of modern VAT compliance. Don’t hesitate to get in touch today.