"VAT will be a simple tax on the supply of goods and services"
Anthony Barber MP, Chancellor of the Exchequer 1972
Well, it most certainly is not that.
The Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in the Community. Thus, goods which are sold for export or services which are sold to customers abroad are normally not subject to VAT. Conversely imports are taxed to keep the system fair for EU producers so that they can compete on equal terms on the European market with suppliers situated outside the Union.
For VAT purposes, a taxable person is the individual, partnership, company or whatever which supplies taxable goods and services in the course of business.
However, if the annual turnover of this person is less than a certain limit (the threshold), which differs according to the Member State, the person does not have to charge VAT on their sales.
The VAT due on any sale is a percentage of the sale price but from this the taxable person is entitled to deduct all the tax already paid at the preceding stage. Therefore, double taxation is avoided and tax is paid only on the value added at each stage of production and distribution. In this way, as the final price of the product is equal to the sum of the values added at each stage, the final VAT paid is made up of the sum of the VAT paid at each stage.
Registered VAT traders are given a number and have to show the VAT charged to the customer on invoices. In this way, the customer, if he is a registered trader, knows how much he can deduct in turn and the consumer knows how much tax he has paid on the final product. In this way the correct VAT is paid in stages and to a degree the system is self-policing.
Given that EU law requires that the standard VAT rate must be at least 15% and the reduced rate at least 5% (only for supplies of goods and services referred to in an exhaustive list), actual rates applied vary between Member States and between certain types of products. in addition, certain Member States have retained separate rules in specific areas.
The most reliable source of information on current VAT rates for a specified product in a particular Member State is that Country's VAT authority.
For the purpose of exports between the Community and non-member countries, no VAT is charged on the transaction and the VAT already paid on the inputs of the good for export is deducted - this is an exemption with the right to deduct the input VAT, sometimes called 'zero-rating'. There is thus no residual VAT contained in the export price.
VAT on goods moving between Member States
No frontier controls exist between Member States and therefore VAT on goods traded between EU Member States is not collected at the internal frontier between tax jurisdictions.
Goods supplied between taxable persons (or VAT registered traders) are exempted with a right to deduct the input VAT (zero-rated) on despatch if they are sent to another Member State to a person who can give his VAT number in another Member State. This is known as an "intra-Community supply". The VAT number can be checked using the VAT Information Exchange System ("VIES").
The VAT due on the transaction is payable on the acquisition of the goods by the taxable customer in the Member State where the goods arrive. This is known as "intra-Community acquisition". The customer accounts for any VAT due in his normal VAT return at the rate in force in the country of destination.
VAT on services is paid at the place where the service has been supplied. This will most often, but not always, be where the service supplier is established. The trader will in those cases account for VAT on his services in the Member State where he is established, applying the VAT rate of that country.
Depending on the nature of the service, VAT may need to be paid in another Member State than that where the supplier is established. This is for example the case with services connected to immovable property; transport of passengers or goods; cultural, artistic, sporting, scientific, educational, and entertainment services.
The detailed application of VAT Varies according to the administrative customs and practices of each Member State within the framework set out by Community legislation.
At the time when the European Community was created, the original six Member States were using different forms of indirect taxation, most of which were cascade taxes. These were multi-stage taxes which were each levied on the actual value of output at each stage of the productive process, making it impossible to determine the real amount of tax actually included in the final price of a particular product. As a consequence, there was always a risk that Member States would deliberately or accidently subsidise their exports by overestimating the taxes refundable on exportation.
It was evident that if there was ever going to be an efficient, single market in Europe, a neutral and transparent turnover tax system was required which ensured tax neutrality and allowed the exact amount of tax to be rebated at the point of export. As explained in VAT on imports and exports, VAT allows for the certainty that exports there are completely and transparently tax-free.