What Is VAT?

Value Added Tax (VAT) is a consumption tax. It’s one of the most common tax systems in the world, especially in Europe, where only a handful of micro-states don’t have VAT.

If you’re looking to start selling your products to customers in the EU, you’ll need to understand how VAT works and what it means for your business. 

How Does VAT Work? 

VAT is applied at every stage of a product’s lifecycle. Let’s say you buy a pen. You’ll pay VAT on your purchase. When the retailer bought the pen from the manufacturer, they paid VAT on that purchase. The manufacturer will have paid VAT on the ink they purchased to make the pens. 

Value Added Tax is applied as a percentage to the sale price of goods or services. Businesses are responsible for collecting VAT on their sales and paying it to tax authorities. In the UK, the standard VAT rate is 20%. So, if you sell a handbag in the UK with a net value of £100, you’ll need to charge £120 and pass £20 to HMRC (the UK’s tax authority). The VAT you collect and pass to tax authorities is called “output VAT.” 

You pass (or ‘remit’) the VAT to the tax authorities by registering for VAT and filing a VAT return. VAT returns are usually filed monthly or quarterly, but it varies from country to country. There’s no single VAT number for all of Europe; you’ll need to register separately in each country where you need to file a VAT return. 

On the plus side, businesses registered for VAT can usually (though not always) claim back VAT they’ve paid on their purchases. The amount you pay on goods and services is called input VAT. In the scenario above, the manufacturer will report and remit the output VAT on their sale to the retailer and claim back the input VAT on their purchase of the ink. 

When Do US Sellers Need to Register for VAT? 

You may need to register for VAT or one of the EU’s VAT schemes if you want to sell or store your products in Europe. 

If you’re selling goods to individual consumers (B2C) in the EU or UK, you’ll need to register for VAT in the country where your customers are. Under the place of supply rules, VAT must be charged to the customer at their local VAT rate. It’s your responsibility to collect this VAT and remit it to the tax authorities.  

The EU has a VAT scheme called Import One Stop Shop (IOSS) that makes it a little easier. IOSS is for reporting B2C sales on goods imported into the EU with an intrinsic value of EUR 150 or less. You still have to collect and remit VAT on those sales but instead of doing it in every EU state where you have customers, you register for IOSS in one EU country and remit the VAT for every state all at once on a single monthly return. 

Storing your goods in an EU country creates a “taxable presence,” meaning you must register for VAT. Using Amazon FBA Pan-EU, a 3PL fulfillment center, is the most common way this is triggered. This rule levels the playing field between EU and non-EU businesses by clarifying everyone’s VAT liability. 

How Much Is VAT? 

Like how there’s no singular sales tax rate across the whole of the United States, there’s no singular VAT rate in Europe. Each country sets its own rates, including the EU, which requires VAT as a condition for membership. The standards range from as low as 17% in Luxembourg to 27% in Hungary. 

The majority of countries also have at least one reduced rate. Reduced rates are typically found on basic food supplies. However, they’re applied to a wide variety of goods and services for various socio-economic and cultural reasons. 

Unlike sales tax, VAT is always included in the listed price unless otherwise specified. This means that you need to show your customers the VAT rate local to them in your prices. 

For example, German customers need to see the German VAT rate on your product. If you’re making sales through your own website, the responsibility for this lies with you. It’s easier than it sounds, though – most shop builders like Shopify have VAT rate settings. 

It’s a legal requirement but will positively impact your sales. A big reason for cart abandonment in Europe is consumers being unsure how much they’ll pay in total before they receive the product. 

In the EU, online marketplaces like Amazon and eBay have to collect and report the VAT on certain sales on behalf of sellers. Your sales have to be: 

• B2C  
• Goods outside the EU at the point of sale 
• Have an intrinsic value of EUR150 or less

This obligation extends to ensuring that they’re charging the right amount of VAT so they will usually calculate and display the price inclusive of VAT for you. 

Goods, Services, and the Place of Supply 

How much VAT you need to apply starts with working out in which country the VAT is due. A major part of working that out is the "Place of Supply" concept. The place of supply is where a business has supplied the goods or services. This matters because it determines: 

• Which country’s VAT rules apply 
• Who is responsible for charging and paying VAT 

What you sell (goods or services) and who your customer is (B2B or B2C) affect the place of supply.

Goods and Services

There are two broad categories of products: goods and services. Knowing which you’re selling will help you work out what VAT rate applies to your products. 

For VAT purposes, goods are physical objects. Obvious examples are books, food, and clothing. Forms of power (like electricity), heat, refrigeration and ventilation also count. Anything that’s not goods counts as a service. Prominent examples include services like taxis, web development, and concert tickets.

Place of Supply Rules

As with every rule, there are exceptions, but here’s the EU’s general rules for place of supply:

Customer	Product	Place of Supply
Consumer (B2C)	Goods	The country where the goods are delivered (where your customer is based)
Consumer (B2C)	Services	Where the supplier is based (there are exceptions to this, like digital/electronically supplied or TBE services)
Business (B2B)	Goods	The location of the goods at the time of delivery (where they’re being shipped from to the customer or where the goods are located if not transported)
Business (B2B)	Services	The country where the customer is based (there are exceptions to this, such as admission to events and land-related services)

Working out the place of supply for services can be very complicated. Digital/electronically supplied services or Telecommunications, Broadcasting, and Electronic (TBE) services are taxed where the customer is based. The difference between what is and isn’t provided electronically can be slim. If you sell downloadable sewing patterns, for example, whether the PDF of the pattern is emailed automatically or by you personally can make a difference.

Wrapping Up

VAT can be complicated when you don't live in the EU. And for US sellers moving into a different market, there can be a lot to navigate. SimplyVAT can help make the process simpler by handling the complexities for you. Whether you're managing VAT, handling VAT returns, or seeking answers to VAT questions, an expert will guide you every step of the way.