VAT rate

What it means

The VAT rate is the percentage applied to the taxable amount. Which one applies is decided not by the seller’s industry or the type of customer but by the kind of goods or service supplied and the period the supply falls into.

The standard rate is the rule and the reduced rates are the exception: a reduced rate belongs only to what the Act lists by name, and everything else is taxed at the standard rate. The rate attaches to the individual supply, not to the document, so one invoice can carry two or even three different rates.

The question of the rate only comes after the question of whether the supply is taxed at all. First it is settled whether it is a taxable supply, and only then is a rate looked for. An exempt supply is not a supply at a zero rate: no rate applies to it at all, and whether the supplier may deduct input tax depends on the kind of exemption, not on the size of any rate.

How it works in practice

The rate in force on the tax point applies, not the one on the invoice date or the payment date. When rates change in January it is the date of supply that decides, and advances already received are settled separately.

The invoice shows the rate on each line and the tax is added up rate by rate, rather than worked out at one rate across the whole document. An exempt supply carries the ground for the exemption instead of a rate, and a reverse-charged supply carries the wording that says so.

When a client widens its range, say an accessories e-shop starts selling books or food as well, we check the classification of each new line under the Combined Nomenclature. The lists in the annexes to the Act are built on its codes, not on the trade name of the goods, and the client stores the resulting rate against the item in its system so that invoicing picks it up automatically.

What to watch out for

When rates change, what trips people up is not the list of items but the period. A December supply invoiced in January still belongs to the old rate, and an advance received before the change is taxed at the rate in force on the day the payment arrived. Documents issued at the new rate have to be corrected one by one and the difference rebilled while the customer is still willing to pay it.

Where a supplier charges a higher rate than the correct one, the customer cannot deduct more than the tax the law actually imposes. In an audit the deduction is cut back to the right amount even though the invoice was paid in full, and the difference has to be recovered from the supplier through a corrective invoice, which drags on once the business relationship has ended.