It’s the most common tax system in the world, applied to some purchases in 140+ countries. This includes the EU, China, and Brazil.
How is VAT calculated?
Value-added tax (VAT) is calculated as a percentage of the total taxable sale. It’s a consumption tax that’s charged at each stage of the production chain. At each stage, it’s assumed there’s an increase in the value of the good or service. That increase, the “value added,” is what’s being taxed.
The cool thing is that, as a business owner, you get back whatever VAT you’ve paid in the chain. Only the end consumer pays out of pocket, and you remit that tax to the government.
How to add VAT
You should add VAT to the purchase total as a separate line item, both at the point of checkout and on the receipt or invoice. You can automate this with a tax compliance software like Quaderno.
In some countries, you’re legally required to advertise prices that are inclusive of VAT, meaning you add tax to the product price even before checkout. Be sure to check the local rules in the countries where you’re selling.
At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or accountant.
Frequently Asked Questions
Who should collect VAT?
Businesses should collect VAT if they meet the following criteria:
They have a physical presence (office, employee, storage or warehouse, inventory) in that country.
You shouldn’t collect VAT until you are registered for the tax in that country.
Do you have to charge VAT for online sales?
Probably. These days there are many countries that tax online sellers, and more are added to the list every year. In these places, you must charge VAT for online transactions only if your annual sales volume exceeds the registration threshold. See question above!
Once you surpass the threshold (which could be upon your very first sale!), you’re legally required to register for VAT.
Once you’re registered, you must comply with VAT rules. That includes obvious steps such as collecting and remitting (i.e. filing and paying) VAT to that country’s tax authorities. But it also includes processes like the reverse-charge mechanism: you don’t charge VAT on B2B sales, because your customer will actually pay the tax directly to the government.
All of this said, you might not need to charge VAT if you’re selling on or through a specific online platform. This depends if you’re selling in one of the countries that have online marketplace tax laws.
If you’ve determined you’re liable for VAT and are now wondering how to get a VAT number in a specific place, check out our tax registration guides. These guides explain – step by step – how to register in different countries around the world. You receive a VAT number only after your registration process is complete!
How much is VAT on my sales?
The VAT rate is usually determined on a national level, so no matter where you live in the country, the tax rate is the same. You can calculate the VAT in your area by entering a postal code into our VAT Calculator.
One reason tax rates might differ is because of the product you’re selling. Authorities often set different tax rates for certain products in order to encourage or discourage their sales. For example, educational products, books, and newspapers often have low or no VAT added (they’re zero-rated) – while cigarettes and alcohol are taxed at rates higher than average.
When should I file VAT returns?
When you first register for VAT, the country’s tax authorities assign you a filing frequency. The frequencies are either monthly, quarterly, or annually – and sometimes a combination of these. This usually depends on the income or sales volume of your business, with high-grossing businesses filing more often and small businesses filing once per year.
Due dates for each filing period are set by the local authorities. You should always double check in the places where you’re registered, to see the tax deadlines for the year ahead. Then you’re sure to have enough time to prepare your VAT return with accurate information, then also file your VAT return on time.
What happens if I forget to collect VAT?
You still have to pay the VAT that’s due on your sales, even if you didn’t collect it from your customers at the point of sale. That means paying out of pocket. In addition, there could potentially be penalties or fines for failing to collect the tax properly.
With a tax automation tool like Quaderno, VAT is collected for you automatically on every sale. You never have to worry about calculating tax correctly or keeping the right records. We’ll track your tax liabilities and give you clear reports for filing season. See what it’s like with a free trial!
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