VAT — value added tax

What it means

VAT is an indirect tax: the company collects it from the customer in the price (output tax), deducts the tax charged by its suppliers (input tax) and remits the difference. Economically the final consumer bears it; administratively the registered payer does.

Input tax deduction is not automatic. It depends on the purchase being used for taxable activity and on a document carrying every required particular - both parties’ VAT IDs and a correctly determined place of supply included.

VAT reaches companies that are not registered for it, too. A non-payer pays it in suppliers’ prices without deduction, and on services from abroad may have to self-assess and remit it. The difference between a payer and a non-payer is therefore not whether VAT is paid, but whether it can be deducted and whether it is added to one’s own prices.

How it works in practice

A § 4 payer files a return and a control statement monthly or quarterly; supplies to the EU add an EC sales list. Registration can also be voluntary, or limited to cross-border purposes under § 7 and § 7a.

The usual situations that change the outcome: reverse charge in construction and on certain goods, exempt supplies, sales to EU consumers through OSS, and imports from third countries.

On registration, tax on assets and stock bought before registration can, under the conditions of the Act, be deducted as well, provided the company has not used them up by the registration date and will use them for taxable supplies. When registering a client we therefore list such assets with their documents and claim the deduction in the first VAT return.

What to watch out for

Rates and the registration turnover threshold have changed repeatedly in recent years, so every calculation follows the wording in force for that period. The costliest error remains deducting from a document issued by an unreliable payer, or on a purchase not used in the business.

Small companies rarely think about liability for a supplier’s tax. If the customer knew or should have known that the supplier would not pay the tax, for instance at a price well below market or with payment to an account that is not published, the tax office can collect the unpaid VAT from the customer, even though its invoice was paid in full.