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18 March 2019

Why VAT matters by Paul Gisby

Everyone pays Value Added Tax (VAT) in day-to-day purchases, which means we all have a vague idea of what it is. But why does it matter and how does it work?

What is VAT?

At its base, VAT aims to cover the increase in value of a product or service at each stage of production or distribution. It is applied to most non-essential products at different rates which differ from country to country.

VAT is paid to governments and is used at that government’s discretion for infrastructure or other projects. It makes up a significant contribution to tax revenue, up to about 1/5th of total tax revenue among OECD countries VAT is a cheap and efficient way for governments to collect revenue because it is collected by businesses from consumers.

VAT in the EU is changing

Soon, businesses, and SMEs, are on the hook to know and charge the VAT rate at the location where the transaction takes place, not where the company is registered.

This was less of an issue when there were fewer cross-border purchases. If all your transactions take place in Spain, then you only need to know the VAT rules in Spain. But should your business want to sell to Italy, France and Germany, then you must know and charge the different VAT rates to your customers in each location. Not to mention understanding the rules and policies related to VAT payments in each respective country.

As the EU has been pushing the Digital Single Market, more and more businesses are selling to customers in other member states. However, the EU’s VAT system is not yet optimised for seamless cross-border sales. The European Commission hopes to have a definitive VAT regime by 2021. This update will streamline procedures and clamp down on fraud, but there will still be nuances that businesses need to be aware of.

Can accountants help businesses understand VAT?

VAT systems have developed on an ad hoc basis that has grown to reflect national idiosyncrasies. The EU is attempting to harmonise these rules, but it is unlikely to be able to overcome specific, regional outliers.

Accountants can help businesses to understand their VAT obligations. Their advice helps businesses navigate the often-difficult variety of rules and regulations.

After all, VAT is about the customer, selling cross-border means that it’s necessary for businesses to know the VAT of every member state where they have business. There are over 200 different VAT rates and policies to become familiar with.

Small businesses especially can struggle to charge the right amount of VAT to the consumer. Let your accountant help!

At the end of the day, consumers should not see any difference in their shopping experience even as VAT obligations on companies change. It’s the smooth navigation in the background that will ensure that business can flourish.

If you are interested in learning more about the ins and outs of the EU’s plans for VAT, read our publication, which gathers all the Commission’s upcoming proposals on VAT, both those that have been agreed upon, and those that are still in negotiation.

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