Intro Into VAT Tax in Europe
The European Union as a block has over the years created policies, rules, and regulations that govern the rates and collection of VAT (value-added tax) within the Union including the United Kingdom. However, since the occurrence of Brexit, the United Kingdom now controls completely VAT within its boundaries. Likewise, other non-EU European countries are also responsible for managing their VAT rates within their jurisdictions.
What is VAT
VAT or value-added tax is a form of compulsory levy that is charged on sold products at every point of transaction. Therefore, VAT is collected at every point of the transaction from the purchase of manufacturing products, purchase by wholesalers and retailers, and purchase by the final consumer. As a result, the final consumer that utilizes the end product or service is ultimately responsible for the payment of VAT. This means that all the businesses that are charged VAT before the purchase by the final consumer are reimbursed once the VAT collected from the final user is remitted and processed. However, if the final consumer is a foreigner who intends to use products outside the jurisdiction, they may usually get a percentage VAT refund for tax paid.
VAT Within the European Union
The European Union created a general directive that provides guidance for the rates of VAT across member states. The rate is set at 15%. However, each member state is at liberty to either implement the advised rates or rollout their desired guidance. In fact, member states like Luxembourg and Hungry have VAT rates that exceed 15%. Nonetheless, the EU has also provided a minimum VAT rate that should not go below 5%. Reduced tax rates have generally been agreed upon between member states for goods such as electronic goods, fuels, necessary female products, and clothes. A small portion of the VAT collected from each nation is pulled together into the European union tax account.
VAT Identification Format in the EU
Within the EU, alphanumeric characters are used to assign VAT numbers to businesses. At the beginning of each VAT number is the member state initials followed by the remainder of the characters. A total combination of 15 alphanumeric characters is considered acceptable. However, most member states use a combination of characters that usually do not exceed 12 alphanumeric characters. This number once assigned to a business is utilized by other businesses to claim back VAT paid. The European Union VAT format by member states is broken-down in the table below.
Number of Characters
9 or 10
9 (a letter is always the last character)
8 to 10
9 or 12
2 to 12
VAT Mechanism Within the EU
In every EU state, the taxation of supplied goods is usually traded for consideration. In turn, the other state permits reciprocity of tax credit. Also, another form of VAT is the intra-state acquisition tax, which is charged when products cross a few member states. VAT is mostly placed at the same exact rate as it is obtained within the final destination of the goods. Additionally, the validity of an EU tax number can easily be verified using the official EU tax verification online resource.
VAT Exemption Within the EU
Within the EU, products and services can either be completely exempted from VAT or charged at 0% VAT. As a result, goods and services that are exempted from tax completely are not eligible for a VAT refund. Whereas, goods and services that are charged at 0% are eligible for a VAT refund.
VAT Within the United Kingdom
In general, the tax rate within the United Kingdom is pegged at 20%. However, certain specific goods and services such as gas, electricity, and children’s clothing and accessories are charged at 20%. Additionally, lower rates of VAT apply to female hygiene products as they are essential to human existence. Also, the price tag is written on the labels of products is usually inclusive of VAT. Annually, VAT on goods and services generates a revenue of over £100 billion. As a result, it accounts for over 15% and 6% of the UK government’s generated revenue and GDP, respectively. Just like in other European Union member states, foreigners are eligible for a tax refund on goods that are inclusive of VAT.
VAT Number in the United Kingdom
All the VAT numbers within the United Kingdom are the end product of a set of mathematical calculations that always equal the last two digits of the VAT number. Generally, the first two characters of the VAT number are alphabets while the remaining characters are numbers. Usually, the VAT number is made of 2 alphabets and 9 numbers. The first number is multiplied by 8 while the second number is multiplied by 7. Subsequent VAT numbers are multiplied by descending numbers until the 7th number is multiplied by 2. The results of each of the multiplied operations are summed up to give the 8th and the 9th numbers, which completes the VAT number. Therefore, any VAT identification number within the UK can easily be verified using the above mathematical calculation.
Other useful articles:
- Sales Tax by State in the United States
- How to Verify Tax Exempt Certificate
- Verify Tax Exempt Resale Certificate by State
- What is a Tax Exempt Status
- VAT Taxes in Europe
- Sales Tax Thresholds by State