The European Union value added tax, also known as VAT, is a tax added to both goods and services for transactions carried out within the EU. Each member state is required to impose a VAT rate that fits in the EU VAT code and to collect the relevant tax. This means that the actual amount of tax can vary from country to country.
EU VAT basics
The basic rules that govern the subject of VAT in the EU are the 6th VAT Directive that was last updated on 26th November 2006 as Council Director 2006/12/EC. This set up a framework for the scope of VAT in the EU member states. It included the tax point and amount, the VAT rate, the obligations of member states to collect the tax as well as any exceptions. It also specified the taxable persons and any special schemes.
In general, any transaction carried out by a taxable person is subject to VAT and this includes items imported into the country. The tax applies to all of the member states but there are locations that are exempt including the Canary Islands, the Channel Islands and Gibraltar.
Tax is paid by all people and businesses who are buying regular supplies but government and public offices are exempt from paying it. So this means that you pay VAT on items or services bought from a business, whether you are an individual or another business. If you are a business, you also charge VAT on the goods or services that you sell if you are VAT registered. For businesses, the idea is that the VAT paid out and collected roughly equals out but if it doesn’t, you either owe the relevant tax collection authority or they owe you. For more information with intricate details, visit www.vatglobal.com which has published EU rates and tables for the relevant countries.
VAT rules and rates
First of the rules that apply to VAT is regarding the place of supply of the services or the goods. This works out which country’s VAT rules should apply to the transaction. For example, if you buy from a business, then the location at the time of the purchase is the place of supply. If you are having goods delivered, then the start of the journey is the place of supply but if you cross borders, then it may be worked out on where the customer is based. This is also the case if the supply is gas, electric or other power supplies.
The EU VAT rate sets a minimum figure of 15% for VAT but there is no upper limit. This means that some countries charge more than this with the top figure being 27% charged by the government of Hungary. Some countries also have a reduced rate on goods that is at least 5%, provided these goods are referred to within the Directive.
There are also a series of services and goods that have been established to be exempt from VAT. Examples include financial services, international air transport and property related services. Other products and services allow businesses to recover the entire VAT outlay, known as Nil VAT. Included in this list are education services, children’s clothing, books, medical supplies and food.
There is an addition rule applying to distance selling businesses such as those selling over the internet, aimed at encouraging free trade. Companies can have a special exemption for VAT when the place of origin rules are applied. If selling over the internet to foreign customers, they can charge the VAT in their country and can register in their consumer’s country if they sell above a set annual threshold.
The time when the VAT is due is known as the Tax Point. This is when the goods or the service is delivered to the customer. At one time, the Tax Point was when the company issued an invoice for the goods or services but this has now been changed. The taxable amount includes any duties and incidentals but excludes VAT. For imported goods, it also includes postage and packaging costs.
Like the rates for VAT itself, the threshold at which it is applied also varies from country to country. When a business reaches this threshold in terms of annual income, it must register for VAT with the relevant tax authority. Some businesses choose to do this even if they aren’t reaching this threshold for different reasons, including the business authority it projects to customers. VATGlobal has created an informative table that lists all the thresholds for the EU countries along with their rates, thresholds and number formats.
Currently the thresholds for the various countries are:
|Czech Republic||1 million (CZK)|
|Hungary||6 million (HUF)|
|Ireland||75,000 (Euro) – Goods
37,500 (Euro) – Services