How to Master VAT in the EU – 7 Major Tips

Since the collaboration between the members of the EU and other countries is increasing, both EU-based and non-EU business owners need to learn more about the taxation system of this large market and the differences within it.

The most important tax for everyday business transactions in the EU is the value-added tax – VAT.

According to the definition provided by Business Dictionary:

VAT is an indirect tax on the domestic consumption of goods and services, except those that are zero-rated (such as food and essential drugs). It is levied at each stage in the chain of production and distribution from raw materials to the final sale based on the value (price) added at each stage.

In order to break it down to more understandable bits, we’ve prepared a guide that will help you get the gist of VAT and learn what details you should pay attention to no matter whether you’re located in the EU or you collaborate with EU-based companies.

Who pays VAT and when?

To cut a long story short, VAT is paid by the seller of goods. However, since this tax refers to the value added with every new step of the production process and every new sale, the direct payer is the consumer.

For instance, if the standard VAT rate is 20% and you want to buy a chocolate that costs €1, you’ll pay €1.20 for that chocolate. As the customer, you pay the 20% VAT rate on that product. The seller is charged that 20%, which is in return collected by the state.

Nevertheless, if the buyer uses the purchased products for their business, they can deduct the tax paid for those goods from the tax charged to their customers. In that case, the government collects only the difference. On one hand, it’s a practical strategy to subsidize businesses and reduce their payments. On the other, the government still gets some amount of money via VAT.

That way, everybody who pays VAT is a taxable person, while every business entity that is charged VAT is an accountable person. You can find out more about this categorization on the example of the Irish VAT system.

When to register?

If you’re a domestic business in any of the EU-members, your eligibility for VAT will depend on the VAT threshold in your country of residence.

These limits vary from country to country, which is why every new business owner should gather information about the conditions in their country. Find out more about these thresholds here.

As for non-EU companies, the governments of the EU-members apply the nil-threshold rule. So, here’s when it’s obligatory to register for VAT:

  • If you run a business that sells goods in several different countries inside the EU, i.e. importing from one member country to another.
  • If you run a non-EU business that makes transactions in one of the member countries. You can learn more about this here.
  • If you’re organizing any events in an EU-country (e.g. business conferences, training sessions, entertainment events) and charge the tickets.
  • If you run a company outside the EU, but stock your goods on the territory of the EU and deliver them from there.
  • If you’re an EU-based business that sells to entities inside the EU and exceeds the domestic threshold for distance sales, you have to be registered as a non-resident, VAT-charged company.

At this point, it’s vital to know not to play with the tax authorities but to register for VAT if you meet any of the registration conditions. Otherwise, you’ll face severe penalties that could put your entire business at risk.

How to get and use the VAT-number?

Now that we’ve clarified who pays VAT and who is obliged to register, it’s time to explain the importance of the VAT-number. In a nutshell, this number is assigned to your business by the local government taxation office for every identification and taxation purpose.

As you register your business that way, it becomes eligible to collaborate with other EU-based businesses.

Moreover, the existence of VAT-identification numbers reduces the risk of being scammed on the territory of the European Union. To be more precise, you can search the European Commission VIES search engine for any business you’re interested in and check if they’re a VAT-registered entity.

This option enables EU-based companies to gather more information about their potential business partners and get a better insight in their professional status. As a result, they can make their decisions on the basis of thorough business facts.

How to charge VAT to (non)-EU businesses?

When you’re selling a product to the resident of another EU-country, there are two possible situations and belonging scenarios:

  • Selling goods to an EU-business – Collaboration between two EU-based businesses is VAT-free if the other party has a valid VAT-number. Still, you can deduct VAT from the amount of money you spent to ensure proper conditions for this collaboration.
  • Selling to customers – If you’re below the aforementioned VAT-threshold, there’s no need for registration in the buyer’s country. On the other hand, transactions that exceed those limits require registering and paying VAT in that country.

Conversely, when you’re buying from an EU-business, you need to pay VAT in your own country. Such a transaction is treated as if you yourself sold the products. However, this taxed amount is deductible later, since it will be treated as an investment for your business.

Furthermore, there are certain rules regarding collaboration with non-EU enterprises:

  • Selling to a non-EU business – In this case, you won’t charge VAT. Nevertheless, you can deduct the VAT on the amount spent for the materials used to make those products you’re about to export.
  • Buying from a non-EU business – The amount included in this transaction has to be charged. VAT is paid upon the reception of the goods in question, at the point of import.

The amount of money you’ll need to pay will depend on particular VAT-rates. Although VAT is a universal tax in the EU, its rates may vary. Apart from that, every country has some reduced rates, in addition to standard VAT-rates.

This is why it’s wise to find out more about different VAT rates before you set out for a business deal with other EU-based businesses.

When to submit a VAT return?

Business owners should know that their obligations related to VAT don’t end with charging VAT for individual sales and purchases. Depending on their country of residence, they will have to hand in VAT returns several times a year.

For instance, entrepreneurs residing in the UK have to submit this return quarterly. When it comes to its content, this return should contain the following financial details:

  • The total number of purchases and sales performed by your business during the accounting period.
  • What amount of VAT you are eligible to reclaim.
  • How much assets on account of VAT you need to pay.
  • The amount of VAT you can refund from your tax authorities.

No matter whether or not you use an accounting software tool, you should always keep a reliable accountant by your side. They will come in handy to help you make your VAT-reports and returns.

Also, bear in mind that you need to hand in a VAT-return even if your VAT sheet is clean, i.e. your business doesn’t need to reclaim or pay any VAT.

How to issue eligible invoices?

If you want to keep your financial documentation in order and work in accordance with the law, it’s vital to maintain proper invoicing.

When it comes to the sole process of issuing invoices, today you can use various automation tools and invoice providers such as Invoicebus to make this procedure as smooth as it gets. However, relying on software is pointless if you don’t know when and how to issue your invoices.

The major rules related to invoicing on the EU market are the following ones:

  • Printed and electronic invoices are valid in equal measure. Every business can choose which type they prefer.
  • Businesses are allowed to redirect invoicing to other enterprises – outsourcing – if they don’t have the capacity to perform that action on their own.
  • Companies can store and keep invoices in any way they prefer (in the cloud, on paper etc.)

Moreover, invoicing rules can vary from country to country.

The rule of thumb is that you need to issue an invoice if you provide another business or a non-taxable organization with some services or products.

In this case, the organizations in question should be VAT-free entities.

On the other side, in some cases, it’s obligatory to send an invoice to a person. Such situations include distance selling when the products are taxable in the country where you send them, as well as providing vehicles for a customer in another EU-country.

Apart from that, when selling services or products to a business outside your country but inside the EU, you won’t include VAT in your invoice. It will be calculated and charged by the tax authorities in your client’s country of residence.

The same rule applies when providing goods for non-EU clients, in which case the local tax authorities will impose their own importation regulations.

Do I need to fill in Intrastat reports?

Due to the diversity of the EU market and the growing desire to unify it as much as possible, businesses working on this territory are obliged to fill Intrastat reports if their annual revenues exceed the Intrastat threshold set for their country.

Here you can check out these limits for each member of the European Union.

On the one hand, it serves as the central database for the governments to track statistical data on trade inside the EU and their position within this system.

On the other side, Intrastat plays a major role in reducing the number of VAT frauds. So, if the total amount of sold and purchased goods exceeds the threshold in your country, your Intrastat filling needs to consist the following information about each transaction:

  • Value and quantity of the goods
  • Country codes for departure and arrival.
  • Detailed description of the sold and purchased products.
  • Commodity code for the products included in the transaction.
  • Conditions regarding delivery.
  • Shipping costs, if any.

By delivering data about your business and its VAT-returns, you contribute to keeping the European Union a transparent economic system. What’s more, all the information gathered that way will be used to create new business agendas for the benefit of business owners across the EU.

E(U)ntrepreneurs will be treated to advanced market conditions, which is why every eligible business owner is required to provide accurate data about their transactions.

Conclusion

The European VAT-system is meant to maintain fair conditions for businesspeople participating in the market that comprises more than 740 million people.

Although there are differences between the members of the EU, the existence and proper implementation of VAT ensures that no business is taxed twice for the same transaction.

As a result, we have a volatile market that offers equal opportunities to millions of businesses working inside the EU.

Mark Thomasson
Mark is a biz-dev hero at Invoicebus - a simple invoicing service that gets your invoices paid faster. He passionately blogs on topics that help small biz owners succeed in their business. He is also a lifelong learner who practices mindfulness and enjoys long walks in nature more than anything else.
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