VAT

VAT (value added tax)

A consumption tax charged on most goods and services in every EU country, collected by businesses and paid to the tax authority.

What VAT (value added tax) means

Value added tax is the harmonised consumption tax of the European Union. The EU VAT Directive sets the common framework: what is taxable, where a supply takes place, when tax becomes due and which exemptions exist. Each member state then sets its own rates within the agreed limits, so the standard rate and the reduced rates differ from country to country.

A VAT-registered business adds VAT to its sales (output tax), deducts the VAT it paid on business purchases (input tax) and pays the difference to the tax authority in a periodic VAT return. If input tax exceeds output tax, the business claims a refund. VAT is therefore neutral for businesses in the chain and is ultimately borne by the final consumer.

Examples across the EU

For example, the standard rate is 19 % in Germany, 23 % in Poland and 22 % in Italy.

Related terms

VAT identification numberThe number a tax authority assigns to a VAT-registered business. Starts with the country code and is required on invoices and for cross-border trade.Reverse chargeA VAT mechanism where the customer, not the supplier, accounts for the tax. Used for cross-border B2B services and some domestic sectors.VAT registration thresholdThe annual turnover below which a business may stay outside VAT. Set nationally, so it differs widely across the EU.Small business scheme (VAT exemption)A simplification that exempts businesses under a turnover limit from charging VAT, filing regular VAT returns and deducting input tax.Tax returnThe periodic declaration a business files with the tax authority to report its tax base and the tax due. VAT returns are monthly or quarterly; income tax returns are annual.

This entry is general information, not tax advice. Rules change; check the current position with your adviser or the tax authority of your country.

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