Brexit has changed how EU member states interact with the UK. Please consult with your tax adviser on how Brexit has impacted your tax situation.
What is VAT?
Value Added Tax, commonly known as VAT, is a general and indirect transaction tax applied to nearly all commercial activities involving the production and distribution of goods and the provision of services. Known as a form of consumption tax, VAT is calculated based on the value added to goods and services as they proceed through the production and supply chain, all the way through to the point of sale. Nearly all goods and services are subject to VAT although there are some exemptions, known as zero-rated goods.
While VAT is calculated throughout the supply chain, it is ultimately passed on to the end consumer as part of the final purchase price of the goods or services.
Is VAT the same as GST?
Fundamentally, GST (Goods and Services Tax) and VAT (Value Added Tax) are similar tax concepts. Both are consumption taxes applicable to value that is added to a product throughout the supply chain. They are both considered to be indirect taxes since the tax is levied on goods or services before they reach the consumer, but are both ultimately paid by the consumer.
Which countries use VAT?
Approximately 140, or 70% of countries use some form of VAT, primarily in Europe, Asia, Africa, and the Nordic regions. Examples of countries and regions that have implemented a VAT system include:
- European Union
- United Kingdom
- South Africa
VAT is implemented differently across different countries. When the production lifecycle of a product or service spans multiple countries, calculating VAT can be a complex undertaking.
Knowing when to register for VAT
Knowing when to register for VAT can be a complex decision, see the VAT Registration help section for further information.
VAT is calculated based on two key components:
- Input VAT: Often related to purchases, input VAT is the VAT that has already been added to goods or services that are purchased. If VAT-registered, buyers can often deduct input VAT when calculating their VAT liability.
- Output VAT: Often related to sales, output tax is calculated and charged on the sale of goods and services from a VAT registered business. This includes sales to both businesses and consumers.
The actual VAT rate fluctuates between countries but the average is around 20% and is charged on the final cost of supply of the relevant good or services.
If a foreign currency forms part of the calculation of the taxable amount, tax authorities have published tables or procedures for establishing the relevant exchange rate. For EU countries, the exchange rate used will often be the latest recorded selling rate on that country’s most representative exchange market(s) at the time the VAT becomes due.
Filing VAT Returns
Knowing when and where to file your VAT returns can be even more complex than the VAT registration process, see the VAT Filing help section for further information.
The relevant tax authority will be able to tell you when your VAT return is due and how frequently you are required to file.
EU customers who likely need to file a VAT return include those who:
- receive supplies of natural gas, electricity, heating, or cooling energy from a supplier in another EU country.
- receive services in an EU country where they are based, from a supplier who is not based in their EU country.
- receive supplies for which they are liable to pay the VAT under the reverse charge mechanism.
- are the final customer in a triangular transaction.
- are the customer in a transaction involving investment gold, gold material, or semi-manufactured products and which is taxed.
Deadlines for VAT payments will vary by country. The relevant tax authority will be able to tell you when the payment must clear their account. Remember to allow sufficient time for the payment to process and reach the tax authorities' account in time, prompt payment of taxes is vital to ensure you avoid any penalties or late payment charges. Certain tax authorities do offer alternate payment plans, for example, UK offers the VAT Annual Accounting Scheme. Tax authorities will occasionally also offer VAT installment or deferment payment plans.
The future of VAT
Digitization and realtime VAT calculation
A number of tax authorities are currently rethinking how VAT is calculated and collected. Initial efforts have included digitizing the VAT registration, filing, and payment process. An example of this would be the UK HMRC's Making Tax Digital (MTD) initiative. Future plans include live VAT calculation and real-time transaction reporting. This will negate the need for regular VAT filings as businesses will maintain VAT compliance in near-realtime.
EU: One Stop Shop (OSS) VAT returns for e-commerce
From July 2021, B2C sellers dispatching their goods from a single country within the EU will no longer be required to register or file multiple VAT returns in the other EU countries where they are selling goods. Instead, they may opt to complete and file a new OSS filing alongside their regular domestic VAT return, this will list all of their pan-EU sales. See the Avalara VATLive article, EU 2021 One Stop Shop (OSS) VAT return for e-commerce for more information.
VAT and the European Union (EU)
VAT for EU member states is governed by the EU VAT Directive. While VAT is legislated at the member state level, all EU member states must incorporate the principle of the EU VAT Directive into their local tax laws. The EU VAT Directive provides a consistent basis for determining VAT within the EU, and provides member states and companies with guidance on:
- What types of transactions are taxable
- To whom the tax is applicable
- Where the VAT is due
- Who is responsible for paying it
- When the VAT is due
The EU VAT Directive consists of four key themes:
- Place of supply: The place of taxation is determined by where the goods are supplied. This not only depends on the nature of the goods supplied but also on how the supply is made.
- Payment liability: The directive state that VAT is payable by any taxable person making a taxable supply of goods or services unless it is payable by another person. Often it is the responsibility of the supplier to collect VAT on the sale to the customer, and then pay the VAT amount to the relevant tax office. Occasionally though, the reverse charge mechanism will shift the responsibility of VAT for a transaction from the supplier of the goods or services to the buyer.
- Point of taxation: The chargeable event is when the legal conditions for VAT to become chargeable are met. VAT becomes chargeable at the point at which the tax authorities acquire the legal right to claim payment. Precisely when the VAT becomes chargeable will depend on if it relates to the supply of goods/services, intra-EU acquisition of goods, or the importation of goods from outside of the EU.
- Invoicing: It’s imperative that invoices are raised correctly as the invoice is the document that allows for deduction of input VAT. The EU VAT Directive outlines a set of basic EU-wide invoicing rules, often complimented by national rules set out by individual EU member states. An invoice is often mandatory for VAT purposes for business-to-business (B2B) supplies and business-to-consumer (B2C) transactions.
EU VAT Rates
The EU dictates a minimum standard VAT rate of 15 percent. Depending on the goods and services involved though, certain transactions may have a reduced rate, a zero rate, or be exempt from VAT. Public postal services are an example of a VAT exempt service while the sale of books in the UK (printed material and e-publications) is an example of a zero VAT rated product.
Import and Export into and from the EU
VAT is applied to most goods and services bought and sold within the EU whereas exported goods and services are not normally subject to VAT. To keep the economy in balance, imports into the EU are often taxed, this enables EU member states to compete fairly with non-EU member states.