What is VAT?

Value-added tax (VAT) is a consumption tax levied on the sale of goods and services in 175 countries, including the U.K. and in the EU. It’s applied to transactions at every stage of a supply chain, from design to manufacturing to consumer sales. Businesses are responsible for charging, collecting, and paying VAT at each stage.

There are various exemptions and exclusions, and different rates and rules depend on which country you or your customers are based in or where the sale or purchase of goods or services takes place. 

While rates are important, finding out what’s taxable and what’s exempt from VAT is critical for businesses across the globe. In the EU, most goods and services are eligible for VAT, such as:

• Products or services sold
• Supplies purchased for business use
• Loaning of goods to someone
• Sale of assets
• Commissions

Businesses in the U.K. trading with an EU VAT-registered business within the single market may not charge VAT on sales to the EU business. But if that product is then sold to an end consumer within the EU, VAT is charged at the rate applicable in their country.  

Tax exemptions may also apply to certain products or businesses, and items or services that fall under categories like charitable donations, education and training, insurance, finance, and credit. Businesses with a VAT taxable turnover below €85,000 are also exempt. 

Exempt items are different from zero-rate taxable items. While zero-rate items are subject to a VAT rate of 0%, exempt items are goods and services with no chargeable VAT whatsoever and include supplies for:

• Charitable organisations and fundraising events
• Energy providers
• Healthcare and medical service providers
• Education goods and services
• Services related to finance, insurance, and investments

VAT registration is key for businesses to comply with regulations, avoid penalties, and build trust with partners and consumers. VAT registration for domestic trade requires proof of business and mandatory form filing, which can differ by governing body. For example, in the U.K. the HMRC requires registration for businesses with a VAT taxable turnover of £85,000 or more be done via post or through the government online portal. 

Simplify VAT registration

You may only need to register for local VAT for domestic trade; however, it’s important to register your business in each country or economic territory where you transact business. So, if you’re trading across borders in the single market (or planning to), you’ll need to register for an EU VAT number. 

Within the EU, businesses are required to register for a VAT number if they are:

• Buying and selling goods across borders 
• Importing goods from other countries 
• Holding live conferences and events 

You can simplify this process with Import One-Stop Shop, which allows a taxable entity to register in a single member state to declare and pay EU import VAT.  

VAT filing can be a complicated, manually intensive process, whatever the scope of your business. However, it’s not all doom and gloom. Once you understand the basics and what’s required of you, there are a number of strategies you can employ to lighten the load.

A VAT return is an official tax document that contains the facts and figures relating to your business transactions, detailing all of your purchases, sales, and expenses. It’s specifically focused on your VAT-eligible transactions and other applicable taxes, and calculates what VAT your business owes and is due. 

Your VAT return will contain information like:

• The net sum of all taxable transactions, both sales and purchases
• VAT charged on all taxable sales and purchases
• Any exempt transactions 
• The total VAT due or repayable

VAT returns vary between countries, with supplementary information often required at the discretion of the governing body to whom it’s made payable. In some countries, it’s simply a difference in format such as the language of the return, how it’s submitted, or the currency used. In others, required information differs, such as the number of input boxes within a VAT return, Intrastat reports (list of goods movement between EU member states), or EC Sales Lists (declaration of total B2B cross-border activity).

Countries establish their own parameters for VAT returns, which often means dealing with different reporting schedules and deadlines. For example, Germany allows just 10 days to file before the end of the reporting period, whereas the Netherlands allows two full months. 

Reporting periods include:

• Monthly reporting
  The most common reporting period in the EU. Allows governing bodies to keep close eyes on VAT transactions across the board. 
• Quarterly reporting
  Enables businesses to file less often.
• Annual reporting
  Often required in addition to either monthly or quarterly reporting.

VAT returns are complex, especially for overseas transactions. Automation helps streamline and document VAT returns processes. 

Avalara VAT returns

The penalties for VAT noncompliance can be severe, including substantial fines and interest charges if VAT returns are not submitted in time and according to regulation. Governing agencies like HMRC can also impose surcharge periods, which can grow penalties over time, as long as the business continues to fail to meet VAT obligations. Failure to meet obligations can trigger inspections and audits from governing bodies, which can be disruptive to your business. 

Penalties and fines aren’t the only negative consequences of noncompliance. Ignoring the strict rules of VAT in your region of trade can lead to: 

Reputational damage
When cooperating with investigators during inspections or audits, an investigator may contact suppliers or business partners to provide proof of receipt (or similar) for certain transactions. Businesses under investigation for tax purposes, or known to be receiving penalties, can suffer reputational damage resulting from other partnering businesses or even consumers. 

Barring from trading platforms or trading bans 
Both tax authorities and ecommerce providers have the power to ban trading on certain applications, or even ban trade entirely, if tax obligations are not met. This can impede or halt certain business channels and sales. 

Criminal charges
In worst-case scenarios, failing to meet VAT obligations continually can lead to criminal charges through fines or even imprisonment. 

It’s best practice to follow the rules to avoid any acts of enforcement and

• Submit VAT returns during VAT accounting periods
• Pay any VAT that is owed

Keeping up to date with changes in the VAT ecosystem is crucial to ensuring your business is compliant. In addition to staying on top of changing rates and new VAT rules for products and services, it’s important to look at how you’re submitting your VAT returns, and invoicing too. 

For example, e-invoicing is becoming mandatory for businesses around the globe. Making Tax Digital regulations in the U.K. will also penalise businesses that are not implementing digital submissions, records, and reports in the correct format. 

Read Making Tax Digital for more info