VAT − Basic rules
If you are an EU-based company, VAT is chargeable on most of your sales and purchases except exports to countries outside the EU.
VAT is paid at each stage of the production process, up to and including the sale to the final consumer.
Selling goods or services
Add the VAT to the price of the goods or services on your invoice. The customer pays you the full amount of the invoice, including the VAT.
Buying goods or services
You must pay VAT as a customer. However, you can usually deduct that VAT from the VAT you charge your own customers.
EU rules on VAT
There are standard EU rules on VAT - but the detailed application of VAT may be different in each EU country.
The basic rules of VAT, which apply throughout the EU, are contained in the VAT Directive and VAT Regulations.
If you are in business - either as an individual, company, partnership or in any other legal form - and you supply goods or services in the course of that business, you must normally:
- register with the tax authorities in the EU country where your business is established and
- charge your customer VAT and account for this to the tax authorities.
Supplies of goods and services on which VAT is charged are known as ‘taxed supplies’.
Although this page refers throughout to selling and sales, money does not actually have to change hands for VAT to be due - you may also have to charge VAT (usually on market value) on goods and services that:
- you exchange for other goods or services,
- you give away free or,
- take for your own private consumption.
If you are in business, you can usually deduct the VAT you have paid on your own business purchases from the VAT you charge your customers. You then need to pay only the difference to the tax authorities, and report these amounts to them in your periodic VAT return.
Sometimes, the VAT your business has paid exceeds the VAT you have charged to your customers. If so, the tax authorities will reimburse or credit you with the difference.
Are all sales taxed?
No. Some goods/services are exempt from VAT.
Some important categories of goods/services, e.g. educational, healthcare and financial services, are mostly exempt from VAT.
If you sell any exempt goods/services, you cannot claim back any VAT you pay when buying in goods/services directly related to such sales.
Must all businesses register for VAT?
If you are making sales in the course of business, you usually need to register. There are 2 exceptions to this:
1. If the sales you make are exempt, you do not always have to register for VAT.
2. In most EU countries, there is a scheme to help small businesses, under which firms whose sales of VAT-liable goods/services fall below a certain annual limit may be exempt from VAT. These limits (‘thresholds’) vary from country to country. In some countries, there is no limit and businesses must register as soon as they make any taxable sales.
Where there is a registration limit and the total value of your taxable sales in the year falls below it:
- you may be exempt from VAT and do not charge VAT but
- you can register voluntarily, in which case you must charge VAT
The limit applies only to businesses established in that country and not to businesses based abroad.
When you make sales to other businesses, you must issue an invoice either in paper or electronic form.
When you register for VAT, you are given a VAT identification number, which you must show on all invoices you give to customers, as well as the VAT amount that is being charged and other standard items.
Although VAT is charged throughout the EU, each member country is responsible for setting its own rates.
Within each country, there is:
- a standard rate, which applies to all or most supplies
- and there may be:
- one or more reduced rates - lower rates that apply to a limited variety of supplies
Some countries are allowed a zero or super-reduced rate on some other sales.
EU legislation limits this freedom to set rates in 3 ways:
- the standard rate may not be less than 15%, although there is no maximum limit
- no reduced rate may be less than 5%, with a few exceptions
Exemption vs. zero-rating
There is an important difference between these 2 concepts:
These are exempt, but 'with the right to deduct’ - so a 0% rate is charged, but you may still deduct all the VAT you have paid on purchases directly related to this sale e.g. exports, certain financial services to customers outside the EU.
These are exempt, but 'without the right to deduct' - you may not deduct the VAT you have paid on purchases related to such sales.
Dig deeper, country by country: