Any company which provides goods or services that are classified as taxable supplies must be registered for VAT, or Value-Added Tax, provided that its turnover reaches the VAT threshold (for instance £81,000 in the UK).
A company must pay VAT in the particular EU member state in which it is based; however as an international company it may be difficult to know which VAT legislation to follow, as each member state has their own VAT regulations, rates and forms.
Usually the standard VAT rate in each member state is 15-25%, with reduced VAT rates of around 5-15%, however the VAT legislation in different member states also differs with regards to which goods and services that are charged at the different VAT rates, and which goods and services that are VAT exempt.
The EU VAT legislation states that the standard and reduced rates of VAT must be at least 15% and 5%, respectively. Member states can have either one or two reduced rates, and any zero-rated items must be approved by the EU.
Items such as food, children’s clothing and public transport are usually zero-rated in e.g. the UK, whereas in other countries, such as Czech Republic, food and public transport are charged at the reduced VAT rate.
Due to these differences, it is imperative that your company is aware of the VAT legislation of the different countries in which you provide or purchase goods and services.
Managing your VAT
In the US, sales tax is charged on goods and services instead of VAT.
The rate of sales tax in the US differs by jurisdiction but is usually around 7%. The main difference between sales tax and VAT is that only the end consumer pays sales tax, whereas VAT is paid on the product every time it is purchased by a business in the supply chain. As with the EU VAT legislation, sales tax legislation differs between member states, which have varying tax rates and categories of goods and services.
Usually, goods and services that are purchased for resale are exempt from sales tax. Thus, it is possible to evade sales tax by convincing the seller that the product is purchased for resale purposes – a tactic which cannot be used to evade VAT. From the perspective of the tax authority, VAT is therefore a more secure and reliable method of tax collection, accounting for large percentages of state revenues in many EU member states.
As a company, it is possible to reclaim your input tax if it exceeds your output tax, and therefore it is important that you keep a close track of the VAT charged on your purchases, and the VAT charged on the goods and services you provide.
It may be necessary for your company to reclaim VAT in several different countries, which means dealing with foreign VAT legislation and foreign documents.
Furthermore, you might get requests for receipts or invoices from customers or suppliers abroad. Unless your employees are able to deal with these enquiries, your company may end up losing not only time and money but also credibility.