A sales tax, referred to as Value Added Tax or VAT, is in operation throughout the EU. However, the application of VAT is not exactly the same in each member state, with requirements and obligations differing significantly.
When does it apply?
If you sell goods or services in a member state of the EU, you may have to register for VAT. This will entail submitting tax returns to the relevant authorities in whichever state you are registered. Registration in one state does not preclude registration in another, although limiting the number of registrations to be maintained can reduce the administrative burden of compliance.
How does it get paid?
VAT returns are the mechanism whereby tax owed to the authorities is paid by the trader, and VAT that the trader has incurred in the course of business activities can be recovered, subject to certain rules. If VAT is incurred in a member state where the trader is not liable to be registered for VAT, this may still be recoverable under an EU-wide recovery mechanism. This can apply, for example, if employees visit a client in an EU member state, and they incur VAT on hotel bills, taxi fares, conference costs, etc.
Different rules
The liability to register for VAT is based on criteria that also differ from state to state. If a trader does not have an establishment in the member state in which supplies are made, they will usually have to register, and, in most states, they will be required to appoint a VAT representative who is resident in that state. Most states have a turnover threshold, above which taxable activity must be registered. Some states require some form of registration as soon as any business activity is undertaken, but do not require returns to be submitted until a certain level of activity has been reached.
Direct Sales
If a trader makes distance sales, i.e. direct sales to unregistered individuals in an EU member state, it will be necessary to register in that state if a different set of turnover thresholds are exceeded, although these are set higher than the basic registration thresholds. A trader can also become liable to register by virtue of making acquisitions, which are imports to one EU member states from another member state.
Groups
In some states, traders joined by sufficient economic and administrative ties can be registered as a group. Members of a group can disregard supplies between them for VAT purposes; in other words, they do not have to charge each other VAT. However, the criteria for registering as a group, even in the states where it is possible, are strict, and it should not be assumed that an application would be accepted. Germany is an exception, where group status is a matter of fact, and therefore a trader cannot choose to group or not.
Bookkeeping
A trader who registers for VAT in a member state is then obliged to comply with the requirements of that state, regarding record-keeping and furnishing returns and other declarations. Penalty regimes exist for non-compliance, so it is important for a trader contemplating trading in the EU to establish their liability for VAT before they undertake activities there.
