What is VAT?

Updated on June 5, 2022

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Taxation and Customs Union

In the European Union, a tax on the value added to products and services, known as the VAT, is levied on a wide range of commodities and services. Almost all goods and services purchased or sold for use or consumption within the European Union fall under this umbrella. As a result, goods and services sold to customers in other countries are usually exempt from VAT. Imports, on the other hand, are taxed in order to maintain a level playing field for EU producers on the European market, where they compete against providers from outside the Union.

Value added tax is

all commercial activities involving the manufacture and distribution of products and services are taxed under this basic rule However, if this person’s yearly revenue is below a specific threshold (the threshold varies by Member State), they are exempt from charging VAT on their sales.
Because it is ultimately paid by the final consumer, it is a consumption tax. It is not a tax imposed on corporations.
This implies the tax burden can be clearly seen at every stage of the production and distribution chain.
Taxpayers (i.e., VAT-registered firms) subtract the amount of tax they have paid to other taxable individuals on purchases for their business activities from the VAT they have collected. In order to keep the tax neutral regardless of how many transactions are involved, this approach has been implemented.
The “taxable person” is the vendor of the products, although the buyer actually pays the seller as part of the purchase price. It is therefore a tax that is levied indirectly.

Why do all EU countries use VAT?

Cascade taxes were the most common type of indirect taxation in use when the European Community was founded by the founding six EU member countries. As a result of these multi-stage taxes, it was hard to identify how much tax was actually included in the final price of a given product because each stage of the production process was taxed separately. As a result, there was always a possibility that EU countries would purposefully or unintentionally support their exports by overestimating the taxes refundable on exports.
Europe needed a neutral and transparent turnover tax system that guaranteed tax neutrality as well as permitted the exact amount of taxes to be refunded at the point of export in order to create an efficient, single market. Tax-free exports can be guaranteed by VAT because of its transparency and completeness, as mentioned in VAT on import and exports.

How is it charged?

Taxable persons are allowed to reduce whatever tax they’ve already paid from their sales price when calculating the amount of VAT they owe on a sale. As a result, tax is paid solely on the value created at each stage of production and distribution, avoiding the double taxation that would otherwise occur. In this method, the final VAT paid is the sum of all previous VAT payments because the final product price is equal to the sum of all previous value additions.

Traders that are registered for VAT are granted a unique identifier and are required to include VAT on their invoices. A registered trader can deduct the amount of tax paid by the customer, and the ultimate consumer can see how much tax he has paid. To a certain extent, the system is self-policing in this manner.

Example

Stage 1

A smelter buys iron ore from a mine. If the sale is worth €1000, the mine will charge its consumers €1200 if VAT is 20%. If it had purchased €240 worth of tools, including €40 VAT in the same accounting period, it would owe €160 (€200 minus €40) to the government. The treasury also receives the €40 and now receives €160, which is the correct amount of VAT owed on the sale of the iron ore.

VAT on supply: €200 VAT on purchases: €40 Net VAT: €160

Stage 2

To the mine, the smelter has paid 200 euros in value-added tax (VAT), plus an additional 20 euros in VAT on other purchases, such as furniture and stationery. Smelters charge €2400, including €400 in value-added tax, for every tonne of steel they produce and sell. The smelter deducts the €220 he’s already paid for inputs and gives the treasury €180 in cash. €180 from the smelter, plus €160 from the mine and an additional $40 in tool and stationery fees from the mine’s tool provider, and €20 from the smelter’s furnishing/stationary supplier.

Euros two thousand
Amount of VAT due on the purchase: €400
Purchases subject to VAT of €220.
Net VAT must be paid: €180 €180 (smelter) + €160 (mine) + €40 (supplier to mine) + €20 (supplier to smelter) = €400 or the proper amount of VAT on a sale of €2000.

VAT rates

In accordance with EU regulations, the standard VAT rate must be at least 15% and the reduced VAT rate must be at least 5%. (only for supplies of goods and services referred to in an exhaustive list).

The rates that are actually used vary from one EU country to the next, as well as between different sorts of items. Some EU countries have also kept different prices for specific products..

VAT authorities in each EU member are the best source of current VAT rates for a given goods. There is a detailed breakdown of the various rates in use within the European Union in the EU information sheet.

More information about VAT rates can be found here.

What is the Commission’s role in application of the EU VAT system?

The European Commission is responsible for ensuring that the VAT Directive is implemented correctly. Member States are responsible for enacting and enforcing these rules on their own territory through national legislation. The Commission, as “Guardian of the Treaties,” is responsible for ensuring that EU law is reflected in national legislation and practise.

How do the EU countries apply VAT?

The VAT Directive establishes uniform principles for EU member states to put into practise at the national level. As a result, each EU country’s administrative and practical methods differ.

National VAT rules can be found here.

Can the Commission intervene in specific cases of application of VAT Directive?

For the European Commission, it has no authority to deal with individual taxpayers’ specific issues nor does it have the authority to express an opinion on facts.

A Member State may be subject to an infringement procedure initiated by the Commission. The only other parties involved in this case are the Commission and the Member State, hence no individual taxpayer may be deemed a party. For example, a technique like this has no direct impact on individual instances.

Therefore, the only way to seek redress in particular cases is to have recourse to the national means of redress – administrative or judicial. You can also submit your case to SOLVIT.

More about complaints

See the detailed information on VAT rules by topic