Value Added Tax (VAT) must be paid on most goods and services at each stage of production and distribution. It is crucial that you understand your tax obligations so to avoid costly mistakes and VAT liabilities.
Note that this is general information. If you need support, we can help! As a value added-service, we will manage all the processes and requirements in relation to VAT. We will show you how to only do what you need to do, removing the confusion and providing a clear way forward.
What is VAT (Value Added Tax)?
VAT stands for Value Added Tax. It is a tax placed on almost all goods and services sold in the European Union. The simple principle behind VAT is that consumers pay a tax on the products they buy based on the value of the product. VAT rates are percentage based, which means the greater the price, the more the consumer pays.
If the consumers pay VAT and not the business, why do I need to worry?
VAT tax is what is known as a consumption tax, as the customer pays the bill — not the business. The idea is the business adds VAT onto their fees and prices as an additional cost and collects this taxation on behalf of the government.
How is VAT charged?
VAT is charged at every stage of sale where the cost of an item is increased. The current standard rate of VAT is 23%. (The standard rate was reduced to 21% from 1 September 2020 to 28 February 2021.)
A manufacturer sells a television to a wholesaler for €100 and charges them VAT on that amount at 23%. Therefore, the wholesaler pays €123 for the television. The manufacturer then pays the VAT of €23 to the government.
The wholesaler goes on to sell the television to a retailer for €200. They add on VAT at 23%, so the retailer pays a total of €246. The wholesaler must pay the government the VAT of €46, but they can reclaim the €23 VAT they have already paid to the manufacturer, leaving €23, which they pay to the government.
When the retailer comes to sell the television to a consumer, they must also add on VAT to his selling price. they sell the television for €300, plus VAT at 23%, making a selling price of €369 for the consumer. The retailer must pay the VAT to the government, but they can claim back the €46 VAT that he paid to the wholesaler, leaving €23 for the government.
The government has now received 23% on the price paid for the television by the consumer (€69). The retailer, wholesaler and manufacturer only paid the amount of VAT they charged to the next group down the line.
When Should Your Business Start Charging VAT?
Value-Added Tax (VAT) registration is obligatory when your sales exceed or is likely to exceed the VAT thresholds. The thresholds depend on your sales in any continuous 12 month period.
The thresholds are as follows:
- €37,500 in the case of persons supplying services only.
- €35,000 for taxable persons making mail-order or distance sales into the State.
- €41,000 for persons making acquisitions from other European Union Member States.
- €75,000 for persons supplying goods.
- €75,000 for persons supplying both goods and services where 90% or more of the sales is from the supplies of goods. However, while all goods and services are part of the sales, the 90% does not necessarily include all goods sold.
The 90% figure does not include goods which you:
- sold at the standard or reduced rates
- manufactured or produced from zero rated materials.
How do I figure out my threshold?
VAT charging is required after your business reaches a certain tax threshold. Currently (as of 2021) this threshold is €75,000 (£85,000 in the UK). Any takings on goods and services after gross income exceeds €75,000 (£85,000) must include VAT. Earnings made before the limit do not need to include VAT. Your sales figure may exceed the threshold limit; however, you may not have to register for VAT.
- John has an annual sales figure of €80,000
- He has incurred VAT on his stock purchased for resale to the amount of €11,220.
- John can reduce his annual sales figure by €11,220 when figuring out if he has breached the threshold - €80,000 minus €11,220 equals €68,780.
- As the adjusted sales is below the registration limit of €75,000, he is not obliged to register.
The reason small businesses do not immediately have to charge customers VAT is that it invariably causes your prices to increase, or your income to decrease — depending on how you opt to manage VAT charges to customers. To remain competitive, some businesses may need to lower costs, so they do not deter customers. As a result, a threshold allows for low-income small businesses to stabilise their finances and remain active in the market by charging consumers lower prices.
How Does VAT Work?
After you hit the VAT tax threshold, you must start charging VAT.
The first step is to register for VAT with the tax authorities in each Member State you are trading in. This allows you to send a VAT return, like a self-assessment tax return. If you are a sole trader, you can register yourself for VAT. If you own a limited company, the small business itself must be VAT registered.
You must register for VAT. If you submit a tax return for your business over the €75,000 / £85,000 threshold, but you haven’t registered for or paid any value-added tax, you will face investigations and penalties. VAT is not optional.
Once you are registered for VAT and are earning above the threshold, you can then charge VAT to customers on goods and services.
There are many challenges associated with navigating and managing VAT. That is why it is important to use a knowledgeable external partner, like us, to support you!
We will manage all the processes and requirements in relation to VAT. We will show you how to only do what you need to do, removing the confusion and providing a clear way forward.
Are there any exemptions to VAT?
If the annual sales of this person are less than a certain limit (the threshold as outlined above) the person does not have to charge VAT on their sales. Please note, the threshold differs according to each Member State within the European Union.
Section 56 of the Value-Added Tax Consolidation Act 2010 provides for a supplier to zero rate the supply of qualifying goods and services to certain authorized persons. It also provides that those authorized persons can apply the zero rate of tax to the acquisition of goods and services received from other Member states and on the importation of goods from outside the European Union.
A “qualifying person” has an annual sale from zero-rated intra-Community supplies of goods, export of goods outside the EU and supplies of certain contract work amounts to 75% or more of their total annual sales for the 12 months preceding the making of an application for authorisation under these provisions.
New VAT Rules – July 1st, 2021
Since July 1st, 2021, ALL goods imported to the EU are now subject to VAT, i.e., the current VAT exemption for importation of goods up to 22 EUR will be removed.
- Different VAT collection possibilities available for B2C shipments up to EUR 150 with IOSS (for B2C only). IOSS (Import One-Stop Shop) VAT collection model has been introduced with the VAT to be collected by the seller at the moment of purchase for B2C shipments.
- Key Advantage of IOSS: ONE Single EU VAT Registration (covering all the 27 EU countries). This is different than the current setup, which requires 1 VAT registration for each EU country in case of DDP.
- Companies from outside the EU with no EU representation (i.e., not established in the EU) must assign an intermediary (tax representative) to deal with EU VAT compliance on their behalf, i.e., to pay the VAT amount to the EU Tax Authority (via a monthly VAT return).
- Without IOSS (for B2C or B2B) – it is the same as the current process in place for shipments above 22 EUR where a nominated representative (Titan Solutions) pays VAT to Authorities upon import and then charges the customer OR the customer pays VAT directly to Authorities.
- Since July 1st, 2021, ALL shipments imported to the EU require a FORMAL Customs Declaration. To successfully clear your shipments with Customs Authorities, it is essential that you provide a complete & accurate Commercial/Pro Forma Invoice.
A consumer purchases headphones worth €20 that are shipped from USA to their address in Ireland
Before July 1st, 2021: The shipment was imported into the EU free of VAT (because the value of the No VAT headphones was below €22)
After July 1st, 2021: VAT charges at the rate of the buyer’s country of residence will apply i.e., Ireland’s VAT rate of 23% applies to headphones price of €20 = VAT of €4.60 due
At Titan, we know how challenging it can be to have to wade through confusing VAT, tax, regulatory and customs requirements – we can help you take back control.
As a value-added service, we will manage all the processes and requirements in relation to VAT. We will show you how to only do what you need to do, removing the confusion and providing a clear way forward.
If you are stuck in the middle of the puzzle and need a helping hand, please get in touch.
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