All European countries charge VAT on goods and services. VAT is a consumption tax added during each production stage of goods or services.
Although VAT is near-universal according to the EU VAT Directive, VAT rates within the EU do differ.
This is because the EU VAT Directive allows Member States to choose whether to implement specific measures. Our guide on understanding VAT compliance explores this in more detail.
Authorities in the EU charge VAT on all taxable supplies of goods or services at each stage of the supply chain. Our blog on who pays VAT, the buyer or seller, explains why in more depth. This is a significant distinction from Sales Tax, which only applies to the final supply. Some goods and services, such as healthcare and financial services, are exempt from VAT.
Companies must also distinguish if they are supplying goods or services to another business (B2B) or a private individual (B2C). This difference dictates how and where they need to charge VAT.
The general rule for B2B is that the product or service is taxed where the customer is established, while B2C services are taxed in the supplier’s country.
There are some special rules, however, such as those related to immovable property or events.
The situation starts to get complicated when transporting goods between countries. The taxable person must take the nature of the goods supplied and how the supply takes place into account.
When dispatching or transporting goods between businesses in different EU Member States, Intra-Community Supply (ICS) and Intra-Community Acquisition (ICA) of goods occur. An Intra-Community Supply of goods is a transaction where the goods are dispatched or transported by, or on behalf of, the supplier or customer between the EU Member States and is exempt, providing it meets certain conditions.
At the same time, a customer making an Intra-Community Acquisition is a taxable transaction. Where the ICA has been carried out define the location of tax, namely the location of the goods after the transport has finished.
Different rules apply to the export of goods to countries outside of the EU where the VAT is charged in the country of import. Instead, the location of the goods once they’ve arrived sets where the supply is. It is then treated as zero-rated in the Member State of export if it meets specific evidence requirements.
We know how complicated this sounds and our experienced team can answer your questions about this side of VAT. Contact our VAT experts here.
Generally, the business charges output VAT on the supply when the supplier carries out a taxable supply. The customer then deducts input VAT on the purchase, if valid to do so.
In some instances, the reverse charge mechanism applies. The reverse charge requires the customer to account for the VAT and is also known as a ‘tax shift’.
Where it applies, the customer acts as both the supplier and the customer for VAT purposes. The company charges itself the applicable VAT and then, where that service relates to taxable supplies, it recovers the VAT as input tax in the VAT return. The VAT charged is instantly reclaimed.
Typically, the customer must provide the supplier with a valid EU VAT number to use the reverse charge.
For an entry-level explanation of VAT, why not read our blog ‘who pays VAT, the buyer or seller?’.
Whilst the general rule on supplies of goods above applies, the rules have changed over the years to apply VAT where the goods are consumed.
When a business sends goods from one Member State to a private individual residing in another Member State, the VAT rate of the country of the customer should apply – unless the supplier can benefit from the EUR 10,000 threshold per annum.
In such a case, the supplier can charge the domestic VAT rate and report the sales below this threshold in the domestic VAT return. However, this exemption does not apply to suppliers established outside the EU or keeping stock in several EU countries.
To minimise the administrative burden of businesses registering in all EU Member States where the goods are delivered, the EU launched the OSS (One Stop Shop).
OSS schemes have simplified the supply of goods by taxable persons to private consumers:
Businesses established in the EU are entitled to use the Union and Import schemes, whereas non-EU companies can take advantage of the non-Union, Union and import schemes.
IOSS (Import One Stop Shop) simplifies the registration obligations for sellers established outside of the EU that sell goods to private individuals in the EU. Similar rules apply for the OSS, allowing the seller to register in one Member State where they account for VAT in their VAT returns.
Other advantages of using this scheme include exemption from import VAT and avoiding customs duties. This scheme, however, is restricted to consignments up to EUR 150.
As per the legislative proposal published by the European Commission on 8 December 2022, the EU intends to widen the scope of OSS to cover more goods and services.
Ready for a deeper dive into VAT rates? Here’s an overview.
The EU’s lowest agreed standard VAT rate in the VAT Directive is 15%, but it is not applicable in any of the EU Member States. The lowest standard VAT rate in the EU is in Luxembourg at 17%, followed by Malta at 18% and Cyprus, Germany and Romania at 19%. Hungary is one of the EU countries with the highest VAT rate at 27%, followed by Croatia, Denmark and Sweden with 25%.
Annexe III of the VAT Directive mentions the threshold for applying reduced rates within the EU Member States. The rate cannot be below 5%.
There are three types of special rates:
When concluding if you should charge VAT to your customers in the EU, consider the following:
EU VAT is always subject to change, so don’t be caught with outdated information. Follow our blog for the latest news on EU VAT rates and analysis of major developments the moment they happen or speak to an expert.
The European Commission has announced its long-awaited proposal for legislative changes in relation to the VAT in the Digital Age (ViDA) initiative. This is one of the most important developments in the history of European VAT, and affects not only European businesses, but also non-EU companies whose businesses trade with the EU.
The proposal requires amending the VAT Directive 2006/112, its Implementing Regulation 282/2011, and Regulation 904/2010 on Administrative Cooperation on the combat of fraud in the field of VAT. They cover three distinct areas:
This regulatory change proposal will still need formal adoption by the Council of the European Union and the European Parliament under ordinary legislative procedures before it can come into force. In tax matters such as these, the process requires unanimity among all Member States.
This blog focuses on VAT digital reporting obligations and e-invoicing, whereas future updates from Sovos will address the other two areas.
The European Commission has, at this stage, chosen not to propose regulation regarding the transmission channel of the reported data to the tax authorities. This is currently left to Member States to decide on.
The reason for this decision is likely because it’s a technical issue, and that the discussion would have slowed down the process of publishing this proposal. The European Commission also appears ambiguous about whether it would want to regulate this in the future.
Many countries primed to introduce continuous transaction controls (CTCs) have been waiting for EU regulators to provide an answer to what rules the individual Member State will need to abide by. It remains to be seen whether this proposal will embolden these Member States to move ahead with plans, despite the non-final status of the proposal. It’s noteworthy that Germany filed for a derogation from the current VAT Directive to be able to mandate e-invoicing just a few days before the original date that the Commission had planned to publish this proposal – 16 November 2022.
Speak to our tax experts to understand how these proposed changes will affect your company.