EU VAT returns | EU VAT Directive

The rules governing the European common system Values Added Tax on goods and services are contained with the EU VAT Directive. It is created by the European Commission in Brussels, and all 27 EU member states are obliged to incorporate it into their local VAT laws – although there are certain optional elements, and opportunities to apply of derogations from the Directive.

The original 6th VAT Directive was updated on 26 November 2006 as the Council Directive 2006/12/EC.

The Directive provides the framework for determining EU VAT’s: the scope; place of supply; the tax point; taxable amount; VAT rate; compliance obligation; exemptions; taxable persons; and a range of special schemes. Below is a summary of the main areas covered by the Directive

Scope

Transactions carried out for consideration on the territory of a Member State by a taxable person acting in that capacity are subject to VAT. Imports by any person are also subject to VAT. This includes the import of goods into the EU, and intra-Community acquisitions and by companies across EU internal borders.

EU VAT applies to all 27 member states and United Kingdom. There are several territories where it does not apply, e.g. Gibraltar and Channel Islands (UK); and the Canary Islands (Spain).

It is applied to all taxable persons, corporates and individuals, carrying out regular supplies, and this typically exempts public offices, government etc.

A supply of goods is the transfer of the right to use and dispose of tangible property as its owner, all other transactions are regarded as the supply of services. The import of goods into free circulation within the EU is also considered a taxable supply, and liable to import VAT.

Place of supply

It is important to determine the place of supply of goods or services to understand which countries’ VAT rules apply to the transaction. For goods, the place of supply is:

The location at the time of supply
Where goods are delivered, the place of supply is the point of the start of the journey. However, for intra-community supplies, the place of supply is where the customer is located. For imports, the place of supply is the country where the goods cleared into free circulation
The place of supply for gas, electricity and similar power supplies in where the customer is located

The Tax Point & Amount

The point in time when VAT becomes due is known as the Tax Point. It is generally the earliest of date of supply; cash settlement; or invoice.

The taxable amount is the whole consideration, including any duties and incidentals – but excluding VAT. For imports, it is the same value as declared for customs’ purposes, including non-EU duties and tax, plus packaging.

VAT rates

Members of the EU must apply principle, ‘standard’ VAT rate of at least 15%, although all countries are now above this minimum. See all EU VAT rates here. There is no restriction on the maximum rate, and Hungary currently charges 27% VAT. Countries may also apply two reduced rates on goods, and this must be at least 5%. The types of goods which may benefit from the reduced rates are provided within the Directive. Countries may also apply other rates in force at the date of their accession into the European Union.

VAT Exemptions

There are a range of scenarios and goods or services for which VAT is not charged. In some situations (VAT Exempt), companies may not recover the input VAT incurred when buying goods or services to be incorporated in their final product. For example: financial services, property-related and international air transport. In other cases, the company may be able to recover the VAT (Nil VAT). For example: medical supplies, children’s clothing, education, food, books.

Right to deduct VAT

The VAT Directive provides extensive guidance on what input VAT incurred as part of their entrepreneurial activity.

This includes the ability to recover VAT from other EU states other than where it is located.

Provision for Distance Selling to consumers

To reduce the EU VAT compliance burden, and encourage intra-community free trade, companies are provided a special exemption on the place of origin rules. If a company sells goods via the internet or catalogue to a foreign customer from within the EU, they must charge their local VAT rate. They can then register in the country of their consumers once they start to sell amounts above a set annual threshold. You may read more about ecommerce EU VAT sales here.

Get help solving your VAT challenges

Ready to see what Avalara can do?

Schedule a demo to see our solution.

Request a demo