A summary on VAT in Europe
VAT in Europe comes into operation in the case of most transactions entered into by businesses when it involves supply of goods and services. VAT is levied all throughout Europe but the system is not harmonized and there are different regulations per country. The VAT system works in a way that the business which is VAT registered collects tax on their sale. This is called output VAT and VAT paid on related purchases is called input VAT and can be reclaimed through a VAT return.
Let us see how laws vary with the country. In some countries the entrepreneur has to register with VAT right from their first taxable supply in that country while in certain other countries one has to register for VAT when a threshold of taxable sales is crossed. Any supply which is not exempt counts as taxable supply. Some companies can register for VAT in Europe when they can furnish proof that they plan to make taxable supplies. Then such a trader is called ” intending trader”.
Even the definition of being in business is different country wise. Some countries ask for proof in the form of VAT number and if we were to take an example of UK then there proof of being in business is if a company has business letterheads or commercial documents.
Place of business is the next important detail. If there is a fixed seat of business in one or more EU countries then that business is said to be established in EU. An office is called a fixed seat and travelling salesmen are not covered by the definition. If there are more than one seats of business then it should be decided which is relevant for a particular supply.
Zero rated VAT ( VAT applied but at 0%) applies in certain conditions such as when physical movement of goods takes place between countries, the recipients’ VAT number is declared on the invoice, there is proof of removal of goods, when goods are removed and proof of that shown within three months of sale.
The next important thing is reverse charge mechanism on services. In this case the recipient accounts for VAT and no VAT is charged on supply. The overall effect is nil VAT liability.
Now let’s talk about treatment of goods and services into and within Europe. When goods are coming into Europe then the VAT is paid at the port of entry. A certificate is issued as proof that payment has been made and VAT can in general be reclaimed by businesses registered for VAT. What happens when goods are within Europe is that B2B (commercial transactions between businesses )can be zero rated and B2C (businesses to consumer) charge VAT at normal rate. For services into Europe B2B transactions are covered by reverse charge and in B2C transactions no VAT needs to be paid. When talking about services within Europe business to business transactions are covered by reverse charge mechanism and business to consumer transactions are charged at normal rate.
I would like to conclude with talking about transactions between the parent company and its branches. A non European company can have European branches and if these branches and the company are separate legal entities then even for VAT purposes they are separate. Moving further No VAT will be payable when goods move from one branch to another of the same legal entity.