What Is a VAT Invoice? Charging Value-Added Tax to EU Clients

Updated on June 1, 2022

What Is a VAT Invoice? Charging Value-Added Tax to EU Clients

Known as value-added tax (VAT), it is a consumption tax that is levied on products, services, and other taxable supplies in the European Union and other countries. More than 160 countries throughout the world levy VAT as a federal excise tax. Customers in the EU are required to pay VAT at the moment of purchase on all goods and services. Companies who provide goods or services to customers located outside of the EU should be aware of their obligations for collecting VAT, even though VAT is not charged by the United States government and is instead handled by each individual state.

Here are the details you need to know about VAT rules and creating VAT invoices:

What Is a VAT Invoice?

How to Charge VAT on Invoices

What’s the Purpose of Value Added Tax?

Where Does VAT Apply?

What’s the Difference Between VAT and Sales Tax?

What Is a VAT Invoice?

If you’re selling goods or services that have been taxed, you’ll need a VAT invoice in order to keep track of your sales. Within 15 days of the end of the month in which the goods or services were delivered, a VAT invoice must be sent.

Using a VAT invoice, a business can charge EU customers value-added taxes and then collect the taxes for payment to the government later.

Certain goods and services sold to European customers by non-EU countries must be taxed, and this is done in order to ensure that European governments are paid for the goods and services that their residents buy.

How to Charge VAT on Invoices

Businesses should take the following actions to ensure that VAT is charged on invoices:

1. Register Your Business for EU VAT

Decide which of the 28 EU countries you’d want to use to register your firm for a VAT number. You have this flexibility. If you can only communicate in English, it’s best to register in an EU country like Ireland, where English is the primary language of instruction. Select a local tax authority and register online for a VAT Mini One Stop Shop (MOSS). If you have clients in more than one EU country, you can consolidate all of your EU VAT into a single tax return, which will save you time. Here’s all you need to know about submitting a non-EU country’s VAT application.

2. Confirm Client Details

Business-to-business trades within the EU are exempt from charging VAT. Only business-to-consumer transactions necessitate the addition of VAT. Inquire about the VAT number of your European clients: all EU businesses are required to have one. You’ll also need to request proof of where they are. This is due to the fact that different EU countries have varied VAT rates. Using the EU website, you can find out the VAT rate for each country.

3. Charge VAT Correctly to EU Customers

Unless your EU client has a valid VAT number, you don’t need to charge them VAT on your invoices. In the European Union, businesses that have legitimate VAT numbers are subject to a reversal charge. Because businesses can be reimbursed for VAT paid on goods and services used in their business, EU enterprises are responsible for filing their own VAT returns.

4. Issue a VAT Invoice

Clients in the European Union will require a VAT invoice. There are additional details on a VAT invoice that are not included on a standard sales invoice. The following items are required to be included on a VAT invoice:

The name and location of your business
Your VAT identification number
The date the invoice was issued.
The account number
Your contact information, such as name and address
If applicable, the VAT number of the client (the invoice will then be subject to the reverse-charge mechanism outlined above). A line on your invoice that reads “EU VAT Reverse Charged” should be included if your customer has a VAT number.
Each service item’s VAT rate and total cost are provided.
Following the addition of VAT, the total amount owed
There was a change in currency.

This may sound confusing, but a VAT invoice actually looks quite similar to the normal sales invoices you’re familiar issuing for clients. Here’s an example of a VAT invoice from Whiteboard:

example of a VAT invoice from Whiteboard

5. Submit VAT Returns Quarterly

Each quarter, your company will be required to file a single VAT return. You can file and pay your VAT online. From the last day of each quarter, you’ll be given a 20-day grace period to pay the VAT you owe. Filing deadlines are as follows:

In the first quarter, April 20 is the start date, and it ends on March 31 in the second quarter, July 20, and the third quarter, October 20, and the fourth quarter, January 20, and the final quarter, December 31.
You’ll have to pay your VAT return in the currency of the tax authority where your firm is officially registered. This means you’ll need to convert all of your VAT returns to euros if you’ve registered for a VAT number in Ireland. Use the official exchange rates set by the European Central Bank to calculate the exchange rate for foreign currencies in your VAT filings.

What’s the Purpose of Value-Added Tax?

As with most taxes, the goal of a value-added tax is to produce money to pay for government programmes and other expenditures. In other words, because VAT is a consumption tax, it generates revenue for the government. A VAT is easier to manage and more difficult for customers to evade because it is administered at the federal level and applied equally to all areas.

Where Does VAT Apply?

Every country in the European Union has to pay a value-added tax, but the rates differ from one country to another within the continent. Only the United States is a member of the Organization for Economic Co-operation and Development (OECD) that does not impose a value-added tax (VAT).

The United States Council for International Business has prepared a list of VAT nations and their individual VAT rates, which you can consult for further information.

What’s the Difference Between VAT and Sales Tax?

Suppliers, manufacturers, distributors, and retailers all collect VAT, which is a sales tax paid at every level of the supply chain. A retailer collects sales tax only when a sale is made to the ultimate buyer, which makes it distinct from VAT. In the end, it’s up to the customer to pay the sales tax.