Once your company is registered, you will need to be aware of the various returns that need to be filed and how all transactions should be declared. These include:
- Filing VAT Returns:
Once registered for VAT, you will be obligated to make periodic declarations of all transactions. These VAT returns are usually due every month or quarter.
- Charging and recovering VAT:
Businesses making taxable supplies must charge VAT at the applicable rate. VAT incurred for taxable activity is recoverable subject to EU and local legislation and is offset against output tax.
- Filing an EC Sales List:
If a business makes sales to businesses VAT registered elsewhere in the EU, filing of an EC sales list will be necessary.
- Filing an an Intrastat declaration:
If a business supplies goods cross-border in the EU, over a certain value, additional filings will be required to be submitted to report these.
- Moving Goods within the EU:
If you are involved in the movement of goods between EU countries – whether it’s for commercial purposes or simply your own stock – there are several VAT compliance issues to consider.
- The Reverse Charge Mechanism:
Certain supplies of goods and services are subject to a mechanism, whereby the customer, rather than the seller is responsible for declaring the applicable VAT. This varies between countries.
All VAT registered businesses are required to file periodic VAT returns. These are statutory declarations where all taxable transactions which took place in that period must be reported and any VAT liability or refund is calculated. Each country has a unique filing deadline which usually corresponds to the date that any tax liabilities must be paid. Failure to submit a VAT return on time or late settlement of a VAT liability will result in penalties being imposed.
The format and reporting criteria will differ depending on the country, as will the filing period and deadlines. Most VAT returns are filed on either a monthly or quarterly basis.
In periods where no taxable activity has taken place, a VAT return still needs to be filed (albeit with zero transactions reported). This so-called ‘Nil’ return is still subject to the standard filing deadlines.
A VAT registered business may appoint an agent to prepare and file the VAT returns on its behalf. In some countries this may be a prerequisite, but even in cases where the company can file the return itself, it is recommended that an agent is appointed owing to the language issues and compliance and reporting complexities.
VAT-registered businesses must charge VAT on their goods or services and may reclaim any VAT they have paid on business-related goods or services.
So, what is the difference between Output VAT and Input VAT? VAT charged on sales is known as Output VAT and the tax charged on purchases is known as Input VAT. 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. This is often done on a monthly basis and it is your responsibility to submit your VAT returns to the local tax authority on time.
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.
There are various additional reports which need to be filed in the EU to supplement the VAT return. This is particularly true when the registered entity trades with other EU countries.
The most commonly required of these supplementary reports is the EC Sales List (ESL). This listing, filed either monthly or quarterly, provides details of sales or transfers of goods and services to other VAT registered companies in other EU countries. The tax offices in the EU use ESL’s to confirm that VAT is being properly and fully declared by all parties in cross-border transactions.
The listing applies to both goods and services. Both companies’ VAT numbers must be registered with the VAT Information Exchange System (VIES) in order to be eligible for an ECSL declaration.
You can make use of this tool to validate the VIES VAT number.
In addition to the declarations required by the EU for declaring reverse charge VAT and the transfer of goods, a supplementary filing that reports all EU movements of goods for customs purposes is also required.
Intrastat reporting is a monthly obligation for companies who move goods cross-borders in the EU (subject to value thresholds). It enables governments and the EU to track trade between countries for statistical purposes. Increasingly, it is also being used as a check on potential VAT fraud.
Like EC Sales Lists, it is separate from the EU VAT returns and reporting process, although based on the same data.
As part of the implementation of the Single Market in the EU, the Member States agreed to various simplifying measures. Most crucially, all duties and taxes on goods imported / exported between EU states were removed. As such, from a VAT perspective, these are not classified as imports and exports, but rather as ‘Intra-community Acquisitions’ and ‘Intra-community Dispatches’.
There is specific legislation which governs these intra-EU sales and purchases and even the movement of a company’s own goods between Member States. In general, reverse charge rules can be applied and there is less admin involved in acquisitions and dispatches to and from other EU countries compared with countries in the rest of the world.
Additional reporting requirements are therefore required (for example EC sales listings and intrastat declarations), but the burden and complication of VAT is significantly reduced.
The EU created the concept of Reverse Charging VAT in order to simplify trade within the Single Market. The Reverse Charge moves the responsibility for the reporting of a VAT transaction from the seller to the buyer of a good or service. This reduces the requirement for sellers to register for VAT in the country where the supply is made.
When a transaction is subject to Reverse Charge, the recipient of the goods or services reports both their purchase (input VAT) and the supplier’s sale (output VAT) in their VAT return. These two declarations offset each other from a cash payment point of view, but the authorities have full visibility of the transactions.
Most sales between EU member states will be subject to a reverse charge and there are also many instances where a domestic reverse charge rule exists within specific EU member states.