VAT-registered businesses: must charge VAT on their goods or services and may reclaim any VAT they’ve paid on business-related goods or services.
VAT charged on sales is known as ‘Output’ VAT and the tax charged on purchases is known as ‘Input VAT’. The output tax must be charged as a percentage of the net sales price and is therefore an additional cost to your customer.
As an example, if your selling price is 100 and the applicable rate of VAT is 20%, you must charge your customer 120. The additional 20 received is not included as your revenue, it is a liability that is payable to the tax authorities. If your customers are also VAT-registered, they will be able to claim back the VAT you have charged them.
If you’ve charged more VAT than you’ve paid, you have to pay the difference to the local tax office. If you’ve paid more VAT than you’ve charged, you can reclaim the difference as a VAT refund.
Each country can have more than one VAT rate. You need to know the applicable VAT rate on all your sales so you can charge it correctly and reclaim it on your purchases. There are transactions where VAT might not need to be charged at all, but in most cases these must still be reported in the VAT return.