Introduction to VAT in Europe

According to accounting firm KPMG over 140 countries have a goods and services, or (value added) tax system. If you’re thinking of launching in Europe, the Middle East and Africa, it’s important to have some understanding of the regulations on VAT and the impact on your sales and pricing structure. This article is designed to give an introduction to VAT in Europe. Please note it does not remove the need for specific advice from a tax expert!

How VAT works

VAT is a tax on sales and is calculated on the price charged by the seller. For domestic transactions the rate of VAT applicable depends on the type of product being sold. Most consumer electronics products will attract the standard rate. Any business with revenue higher than a locally determined threshold will be required to register for VAT and once registered that business will apply the prevailing rate to all goods and services sold. Any purchases made that include VAT are offset against VAT charged on sales and the difference is paid to the local tax authority.

VAT on domestic B2B transactions

In domestic markets, businesses will normally refer to ex-VAT pricing, since any VAT charged by the seller is reclaimed by the buyer. This is the key incentive for registering for VAT. Being able to recover VAT paid effectively lowers the cost of purchases.

VAT within the European Union

One of the advantages of doing business within the European Union is the concessions in place that support the key principle of an open market. Trading with a VAT registered business in another member state (country in the European Union) allows the seller to “zero rate” the transaction. No VAT is charged by the seller and instead the buyer is responsible for paying that VAT locally.

The other concession is that businesses registered for VAT in one member state who would like to sell to consumers in other member states can do so freely, charging local VAT, provided they do not exceed the annual threshold set by the buyer’s member state.

Do I need to register for VAT?

If you are a business turning over more than the local VAT threshold you will need to register for VAT in your domestic market. If you are an international seller using online platforms to sell direct to consumers you will need to register for VAT in at last one EU member state. If you are registered for VAT in one member state and your sales to consumers in another member state exceed the annual distance selling threshold there you will also need to register in that member state. This rule applies to all member states when sales exceed the local distance selling threshold.

Where can I find out more information on VAT?

For further details please refer to these online resources:

Submitting a UK VAT return

Selling goods in the UK using online marketplaces

Why online marketplaces are taking more interest in your VAT status

EU VAT rates

EU VAT distance selling thresholds

How does VAT affect my product pricing?

Since consumers always refer to VAT inclusive prices you’ll need to consider this when setting the MSRP of your products. In calculating the margins available to retail and distribution partners you should take the VAT inclusive price and work backwards, first deducting the VAT element and then calculating channel margin from the ex-VAT price less the price you intend to charge.

How can we help?

Unlock EMEA is a strategic sales partner to some of the world’s most innovative consumer electronics brands. This introduction to VAT in Europe forms part of the Market Preparation phase for our clients. We help them build a price model for their products that is robust enough for all markets. If you would like to find out more visit our Contact Us page.

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