Running a business involves knowledge of various terms related to business and one such thing is tax, rather than VAT. It is a significant part of the business that is directly related to the economic growth of your business. It is one of the most well-known terms that has resulted in the success story of taxation on access globe over the years. It is value-added on the price of all taxable goods and services.
Here in this article, we will discuss more on this in detail to give you a clear idea.
So, let’s understand what VAT is!
VAT is the value-added tax or the most common type of consumption tax that is applied on all products, services, and other taxable goods in all European countries. It is chargeable for most of the sales and purchases through the rates may vary depending upon the country where it is applied. EU customers pay VAT on all products and services that they purchase. On the other hand, customers of the United States do not pay VAT rather they pay sales tax which is governed by individual states. This is mostly spread within European Union and any goods sold outside the EU are not subject to VAT.
What is VAT Invoice
VAT is a federal tax that is chargeable for EU clients. A VAT invoice is a commercial and also a vital accounting document that gives detailed information about the products and services that are subjected to value-added tax. This is issued by the business enterprise within 15 days of the end of the month in which the product or service was delivered. VAT invoice helps the business owners to collect the VAT from the government by charging the VAT to the EU clients. Similarly, non-EU countries also need to collect VAT on certain products that EU customers purchase to ensure the EU government receives tax.
When is a VAT invoice issued?
An accountable person that can be a business, company, or tax individual can register for VAT. Issuing a VAT invoice will record a business with the government for a particular sale. If a business makes more than 85k a year then one is bound legally to register VAT or issue VAT invoices. The process should be completed within 30 days and failing to do so can lead to a penalty of 5-15% of the VAT due.
How to Charge VAT on Invoice?
To charge VAT on invoices business owners must follow the below steps.
1. Register your business
You must register your business for VAT for one of the 28 EU member countries as per your requirement and convenience. If you have clients in more than one EU country then it would be easier for you to register online with your local tax authority. This helps you to get your tax return by submitting all your EU VAT together. For business owners from non-EU countries, one must research well to be aware of all the details regarding EU VAT.
2. Charge VAT correctly to your customers
Ensure that the customer has a valid VAT number so that you don’t need to charge on your invoices. Moreover, businesses with valid VAT numbers in the EU are eligible for reverse-charge mechanisms in which the VAT will be reimbursed to them for running their business.
3. Confirm your client’s details
Confirming client details is a must because charging VAT varies on certain factors. If it is a business-to-business transaction then you need to charge VAT. But if the transaction is between business and customer you would need to charge a specific VAT amount. Also do remember to ask your client about their location as the VAT amount varies from place to place.
4. Issue VAT Invoice
While you issue a VAT invoice keep in mind the below pointers. Add the following:
- Business name and address
- Your VAT number
- Client’s name and address
- Client’s VAT number (if applicable)
- Invoice number and date
- VAT rate and the amount charged in specific products
- Total amount after charging VAT
- Also, the currency applied
5. Submit VAT returns quarterly
You will have to submit a single tax return for a specific quarter. Do remember that you will have 20 days to pay the VAT amount owing from the last day of each quarter. Besides, you need to pay the VAT in the currency of the local authority where your business is registered.
What is the purpose of Value-added TAX and where does it apply?
Value-added tax just like any other form of tax is meant to raise revenue for the government. It fills in the fund for the smooth functioning of the government and settles the expenses of various government programs. VAT is easy to monitor on a federal level as this is equally distributed over the jurisdiction. At the same time, VAT can not be evaded by the customers because this is applicable over all jurisdictions and is applicable on all consumer goods. Products sold to foreign consumers are not under VAT whereas imported goods are under VAT just to provide the EU producers with fair competition with global markets.
VAT is applicable for all the 28 countries within European Union. VAT varies from country to country within the EU. Only the United States among all the OECD countries does not levy VAT federally.
What is included in a VAT invoice?
There are several elements included in a VAT invoice. Those are:
- Invoice number
- VAT identification number
- Business contact information- name and logo, phone number, address, etc.
- Billing date and due date
- Client contact details- name, phone number, address, etc
- Itemized list of products with quantity and price
- VAT per item
- The total amount with and without VAT
- Discounts(if any)
- Payment terms
What are the types of VAT?
Vat is categorized into three main types depending upon the amount charged per sale.
Full VAT Invoice
It is the most standard and basic VAT invoice format used when goods and services are subjected to VAT. This type included all the information that was mentioned earlier.
Simplified VAT Invoice
This type of VAT invoice is issued when the due amount is less than $296.81. This type of invoice is s[ecially used for small and inexpensive sales and does not require the buyer’s details. It includes the client’s details, goods, and services sold, price, and VAT rate.
Modified VAT Invoice
When the due amount exceeds $296.81 then a modified VAT invoice is used. It includes all the details same as the full VAT invoice including the final amount including VAT.
FAQs related to VAT invoice
VAT and Sales tax may seem similar but it is not. Value-added tax or VAT is levied at every stage of a supply chain. It is charged by suppliers, manufacturers, distributors as well as retailers. Whereas the sales tax is charged at the end when the sales are made to the end customer. In this only the retailer charges this tax to the end customers on their purchase.
If the business is not registered VAT, then an invoice can be issued without a VAT number.
Yes, the VAT invoice is amendable in case the VAT amount or rate mentioned is incorrect. In such cases, one needs to issue a credit note along with a newly revised invoice.
Wrapping up!
VAT is quite common in European countries which is the consumption tax charged on all consumer goods and services that are sold and bought in the European Union. This article gives an insight into the VAT invoice and how it is done. Do remember the points before you create your VAT invoices for your EU clients from now on!
