What is VAT and its rates in European countries?

What is VAT and who pays it?

Value-added tax (VAT) is one of the key tax instruments in the European Union and its member countries. It is also used in many other countries around the world, but the rates and rules for its application vary significantly depending on the specific country.

VAT is a tax on the consumption of goods and services. It is usually levied at each stage of the production and sale of goods or provision of services in a country. The seller collects VAT from the buyer and submits it to the authorities. This tax is included in the price of goods and services and is levied on the end consumer.

VAT payers in the European Union are legal entities and businesses. That is, enterprises, private entrepreneurs and self-employed persons.

They are the ones who are responsible to the tax authorities for the collection, administration, payment and reporting of this tax. Private persons, in most cases, are not VAT payers, since they do not conduct business activities (although there are certain exceptions for the sale of transport and real estate).

Transactions subject to VAT tax

In the European Union, value-added tax applies to a fairly wide range of transactions, including the sale of goods and the provision of services. Transactions subject to VAT in the EU include the following:

• All transactions involving the sale of goods within the EU, including the import of goods from third countries.
• Providing various types of services in the EU, including consultations, transport and logistics services, information technology services, construction, restaurant services and much more.
• When selling goods and services between different EU member states.
• Transactions between companies if both parties are registered for VAT.

It is important to know that there are categories of goods and services that are completely exempt from VAT tax or have reduced rates applied to them. For example, exports of goods and services outside the EU are usually not subject to VAT, and for certain categories of goods or services, such as food, medical services or books, there are special VAT regimes and rates.

VAT registration

In the European Union, persons who carry out VAT-taxable transactions must register for VAT. VAT registration rules vary across the European Union. But in general, VAT registration is required in the following cases:

• If the annual turnover from transactions subject to VAT exceeds the established threshold. The size of the threshold varies from country to country. For example, in Germany, the threshold is 175,000 euros, and in France it is 33,200 euros.
• If the company carries out transactions subject to VAT in several countries of the European Union.
• If the company carries out VAT-taxable transactions with companies from other countries of the European Union.

Once a company becomes a VAT payer, it is required to keep records of its transactions and submit tax returns to the tax authorities within a specified period, often quarterly or monthly.

VAT rates in the European Union

The European Union has a common minimum VAT rate of 15%, but the final rates are set in each country separately. Thus, VAT rates in Europe vary from 16% to 27%. For example, the lowest VAT rate in Europe is set in Luxembourg - 16%, and the highest in Hungary - 27%.

The average and most common VAT rate in Europe is 20-21%.

The VAT rate may also depend on the type of goods or services. Some countries have reduced rates for certain categories of goods, such as food or books. The EU sets a minimum reduced rate of 5%, and EU countries are already starting from this indicator. These measures are aimed at supporting certain industries or social groups.

Below we will look at what VAT rates apply in Europe in 2023:

Full exemption from VAT

In addition to lower rates, EU countries also apply the practice of complete exemption from VAT taxation. Thus, full VAT exemption in Europe usually applies to certain categories of goods and services that are considered particularly important to society or business in a particular country. But, if we generalize the categories to which a full VAT exemption may apply, we can point out the following:

- Medical services (consultations, operations, treatment and other medical procedures).

- Educational (schools, universities and training centers)

- Banking, insurance and financial services.

- Renting housing for long-term living (for example, apartments and houses).

- Public services provided by public authorities or municipalities (postal services or cultural services).

- Social services, such as those provided by charities or institutions that assist those in need.

- Export of goods and services outside the European Union.

It is worth knowing that states can annually change VAT rates and the rules for applying reduced rates depending on the economic situation in the country and the needs of a particular product/service.

Recommendations for effective selection of VAT rates

Optimizing VAT calculations is an important task for enterprises and companies, since the correct choice of VAT rates can significantly affect financial flows and tax burden. To effectively choose VAT rates, you should pay attention to:

1. It is important to carefully review the tax laws in your country and activity. This will allow you to understand which goods and services are subject to different VAT rates and which rules apply to your business.
2. Evaluate all the products and services your company provides or uses. Divide them into categories to determine which are subject to standard VAT rates and which may be subject to reduced rates or VAT exemption.
3. If your business provides goods or services that may be subject to reduced VAT rates (such as food or books), make sure you apply those rates correctly. This can save you money and make your products and services more attractive to buyers.
4. If you are engaged in B2B trading and the company is registered for VAT, consider using the reverse charge method. This will allow you to avoid including VAT on invoices for your clients, but still account for the tax correctly for payment to the authorities.
5. The use of specialized programs and systems for VAT accounting can significantly simplify the process of calculating and paying tax. This will also help avoid errors in accounting and compliance with tax obligations.

In case of a complex tax situation or if you are not sure about the correct choice of VAT rates, contact professional tax advisers. They can help you optimize your tax strategy and avoid potential problems with the tax office.

Effectively managing VAT rates can help your company reduce its tax burden and become more competitive in the market. However, it is important to comply with all tax laws and requirements to avoid negative consequences in the form of fines and penalties.