VAT - Value Added Tax Simply Explained

Value Added Tax (VAT)

VAT is a central element of the tax system that affects almost every transaction in economic life. It is levied on the sale of goods and services and has a direct impact on businesses and consumers alike. By understanding its mechanisms, business owners can manage their tax obligations more efficiently and consumers can better understand how taxes affect the price of products. Discover the facets of VAT and its importance for trade within and outside the EU.

Definition: What is Value Added Tax?

VAT is an indirect tax levied on the sale of goods and the provision of services. It is applied at every stage of the production and distribution chain, but is ultimately borne by the end consumer. This means that companies pay the tax to the tax office, but pass it on to the customer in the price of the goods and services. A key feature of VAT is the input tax deduction procedure, which allows companies to deduct the VAT they pay on purchases (input tax) from the VAT owed on their sales. This avoids double taxation and ensures that VAT is ultimately only paid by the end consumer. In many countries, especially within the European Union, sales tax is also known as value added tax (VAT) as it taxes the value added to the original value at each stage of production and distribution.

Value Added Tax Abbreviation

The abbreviation for Value Added Tax is "VAT". The concept of VAT was first introduced by French economist Maurice Laur茅 in 1954, who implemented it in France. The term "Value Added" refers to the incremental value that is added to a product at each stage of its production or distribution, and the tax is levied on this added value. The abbreviation "VAT" emerged as a convenient shorthand for referring to this tax system, making it easier to discuss, legislate, and implement.

VAT is used in over 160 countries worldwide as a crucial source of government revenue. The abbreviation "VAT" has become part of the common lexicon in finance, taxation, and everyday commerce. It is used in legislation, financial documents, and by businesses and consumers alike to refer to the tax that is applied to goods and services at each stage of production and distribution, excluding the final consumer. The use of the abbreviation facilitates clear communication, ensuring that discussions about tax policies, compliance requirements, and fiscal strategies are accessible and universally understood.

In everyday use, "VAT" is seen on receipts, invoices, and pricing labels, indicating the tax component of the cost of goods and services. Businesses use the term "VAT" when filing their tax returns, calculating the tax they owe based on the difference between the VAT they collect on sales and the VAT they pay on purchases. The abbreviation simplifies complex tax discussions, making the concept more approachable for both professionals in the field and the general public.

What exactly does Turnover mean in this context?

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How high is the VAT in Germany?

There are two main VAT rates in Germany: the regular rate and the reduced rate. The regular VAT rate is 19%, while the reduced rate is 7%. The regular rate of sales tax is applied to most goods and services, while the reduced rate of sales tax applies to certain goods and services that are considered essential or culturally valuable, such as food, books, magazines and mass transit. This distinction is intended to ensure that basic necessities remain more financially accessible. There are also some specific exemptions and special rules for certain products or services that may be exempt from VAT or subject to special rates.

Who is liable for VAT in Germany?

As a rule, entrepreneurs and companies that carry out a commercial or professional activity independently in Germany, i.e. within the country's borders, are liable for VAT. This obligation applies regardless of the legal form of the company, i.e. for sole traders, partnerships, corporations and other types of companies. The VAT obligation applies to the supply of goods and the provision of services that an entrepreneur carries out as part of their business in return for payment.

In addition, legal entities that are not engaged in business activities, such as associations, are also subject to VAT in certain cases if they regularly conduct business operations that go beyond pure asset management.

However, there are exceptions to VAT liability. Small businesses, for example, whose turnover did not exceed a certain amount in the previous calendar year and is not expected to exceed a set threshold in the current year, may be exempt from VAT. This regulation is intended to reduce the administrative burden for smaller companies. Nevertheless, small businesses have the option of waiving the small business regulation and opting for regular VAT liability in order to be able to claim input tax deduction.

What are the exemptions from VAT liability in Germany?

There are several exemptions from VAT liability that are provided for in most VAT systems, including the German one. These exemptions are defined by law and aim to exempt certain goods and services from VAT for social, cultural or economic reasons. The most important exemptions include:

Small business regulation	Small businesses whose turnover plus the VAT due on it did not exceed a certain amount in the previous calendar year and is not expected to exceed this amount in the current calendar year can be exempt from VAT. In Germany, this limit is currently 22,000 euros turnover in the previous year and a forecast of no more than 50,000 euros in the current year.
Exports	Deliveries of goods abroad (exports) are exempt from VAT as they take place outside the VAT jurisdiction. This is intended to support the competitiveness of companies on the international market.
Intra-Community supplies	Supplies from one EU member state to another are exempt from VAT under certain conditions. The prerequisite is that the recipient of the goods is an entrepreneur and acquires the goods for his company.
Transactions regulated by international maritime law and certain aviation transactions	These are also exempt from VAT under certain conditions.
VAT exemptions for certain services	Some specific services and goods are exempt from VAT. These include, for example: Educational services & medical treatments. More information on this in the next section.

These exemptions require detailed examination and documentation in order to prove the conditions for tax exemption. Companies and entrepreneurs should therefore inform themselves precisely about the applicable regulations or seek expert advice to ensure that they fulfill all tax obligations correctly.

What is VAT-exempt in Germany?

Certain transactions are exempt from VAT if they are legally exempt from VAT. These exemptions are intended to relieve or promote certain economic sectors and support social, cultural or educational objectives. Services that are typically exempt from VAT include:

Medical services: Many healthcare services provided by doctors, dentists and similar medical professions are exempt from VAT. This also applies to certain medical activities that are closely related to healthcare.
Educational services: Educational services, such as MBS courses, provided by state-recognized institutions, such as schools and universities, are often exempt from VAT. This may also include specialized courses and continuing education if offered by eligible institutions.
Social care services: Social care services and certain charitable services provided by recognized organizations also enjoy VAT exemption.
Cultural services: Events and services of a cultural nature provided by certain institutions may be exempt from VAT. This includes, for example, theater performances or museum visits under certain conditions.
Financial services: Certain financial services such as the granting of loans, the management of special assets and insurance services are exempt from VAT.
Letting and leasing of immovable property: The long-term letting of residential property is generally exempt from VAT, although there are exceptions, for example in the case of short-term lettings or vacation homes.
Exports and intra-Community supplies: Deliveries of goods abroad (exports) and within the EU from one member state to another under certain conditions are exempt from VAT in order to promote international competitiveness.

This list is not exhaustive and the exact conditions for VAT exemption may vary depending on the country and the specific case. It is important that companies and individuals who think they may qualify for VAT exemption check the relevant legal requirements carefully or seek professional advice.

Calculate Value Added Tax

The calculation of VAT depends on whether you have the net or gross amount of a good or service and want to apply the corresponding VAT rate. In Germany, the regular VAT rate is 19%, while the reduced rate is 7%. Here are the basic formulas for calculating sales tax:

If you have the net amount and want to calculate the sales tax:

VAT=Net Amount脳VAT Rate

If you have the gross amount and want to find out the net amount:

Net Amount=Gross Amount1+VAT Rate

These calculations enable companies to calculate the prices of their goods or services correctly and to pay VAT to the tax office correctly.

Example for the calculation of VAT from a net amount:

Assume the net amount for a product is 100 euros and the applicable VAT rate is 19%.

Value added tax=100 Euro脳0.19=19 Euro

The gross amount paid by the customer would therefore be 119 euros.

Example of recalculation from a Gross Amount to a net amount:

Assume the gross amount of a product is 119 euros and the applicable VAT rate is 19%.

Net amount=119 Euro1+0.19=119 Euro1.19鈮�100 Euro

The net amount would therefore be 100 euros.

Important technical terms and synonyms
on the subject of VAT

Term	Explanation
Value added tax (VAT)	Tax on the consumption of goods and services that is borne by the end consumer.
Input tax	Value added tax paid by companies on input services, which can be deducted from their own value added tax liability.
Small business regulation	Regulation that allows small businesses to be exempt from VAT if their turnover does not exceed certain limits.
VAT identification number in the EU (VAT ID)	Number assigned by the tax office to every entrepreneur in the EU for trade between member states.
Intra-Community supply	Supply of goods between traders in different EU member states, which are tax-free under certain conditions.
Value added tax liability	Obligation of entrepreneurs to pay value added tax for their VATable services.
Advance VAT return	Advance return in which the VAT payable for a specific period (usually monthly or quarterly) is calculated.
VAT return	Annual submission in which the total VAT payable for the previous year is declared to the tax office.
Exports (export deliveries)	Tax-free deliveries of goods from an EU member state to a third country.
Imports (import VAT)	VAT levied on the import of goods from third countries into the EU.
Tax exemption	Certain transactions are exempt from VAT under specific conditions.
Reverse-charge procedure	Procedure in which the recipient of the service is liable for VAT, not the supplier.
Sales tax payable	The difference between the sales tax payable to the tax office for own sales and the sales tax-deductible as input tax.
Differential taxation	Special taxation procedure for used goods, works of art, antiques and collectors' items, in which the tax is levied on the difference between the sales price and the purchase price.

These terms cover the basic aspects of VAT and help to develop a better understanding of this complex topic.

VAT Identification Number

The VAT identification number (VAT ID) is a unique code that is assigned to companies within the European Union (EU) for identification purposes within the VAT system. It is particularly relevant for companies that trade across borders within the EU. The VAT ID number is crucial for the processing of VAT in transactions between companies from different EU member states and serves to exempt Intra-Community deliveries and purchases.

Purpose and Functions

Tax exemption: The VAT ID number enables companies to buy or sell goods and services between EU member states without VAT. It serves as proof that the company is a business customer within the EU.
Advance VAT returns: Companies use the VAT ID number in their advance VAT returns to correctly declare intra-Community acquisitions and deliveries.
Recapitulative statements: In addition, companies with VAT ID numbers must submit so-called recapitulative statements (SRs) on their EU-wide movements of goods to ensure correct taxation.

Application

In Germany, the VAT ID number is issued by the Federal Central Tax Office (BZSt) upon application. Companies receive a tax identification number when they are founded and can also apply for a VAT ID number if they are active in the EU internal market. The application can be made online, in writing or, in some cases, by telephone.

Verification

The validity of a VAT ID number can and should be checked via the EU-wide VAT Identification Number Verification System (VIES). This verification is important to confirm the validity of business partners and to ensure that invoices for Intra-Community transactions are issued correctly.

In summary, the VAT number is an essential tool for businesses in the EU single market, facilitating the correct handling of VAT in cross-border transactions and helping to prevent tax evasion.

Format

The general format of the VAT number is:

[country code][unique number]

The VAT number in the European Union follows a standardized format that differs slightly from country to country, but always starts with a country code followed by a series of digits (and sometimes letters), the exact number and structure of which can vary from country to country. The format ensures that the number is unique within the EU.

Distinctions

The terms sales tax, value added tax and input tax all play a role in the system of taxation of goods and services, but differ in their meaning and application.

Overview of the difference between sales tax, value added tax and input tax

The following diagram shows the difference between sales tax, value added tax and input tax in a clear graphic.

What is the difference between Sales Tax, Value Added Tax and Input Tax in detail?

The difference between sales tax, value added tax and input tax is:

Sales tax is the general term for the tax levied on the sale of goods and services. It is calculated at every stage of production and distribution and is borne by the end consumer. Companies pay the sales tax collected to the tax office, but are not themselves the final payers of this tax.
VAT refers to the specific principle of taxation within the sales tax system, where only the value added at each stage of production and distribution is taxed. VAT avoids the double taxation of goods and services by allowing businesses to deduct the tax they pay on purchases (input tax) from the tax they collect on sales. In many contexts, the terms sales tax and VAT are used interchangeably, although the term VAT emphasizes the principle of the VAT system more strongly.
Input tax is the sales tax that a company has paid when purchasing goods or services for its business activities. This can be deducted from the VAT that the company charges on its own sales. The right to deduct input tax means that ultimately only the added value is taxed and prevents a cumulative tax burden across the production chain.

To summarize: Sales tax is the general tax on sales, VAT refers to the system that only taxes added value, and input tax is the sales tax paid by a company on its purchases, which it can deduct from its own sales tax liability.

Laws and Guidelines on Value Added Tax (VAT) in Germany

The German Value Added Tax Act (VAT) and the German Value Added Tax Implementation Ordinance are of central importance for VAT in Germany. These regulations define how VAT is levied, who is liable for VAT, which services are subject to VAT and which exemptions or reductions apply. Here are some key elements and guidelines to be aware of:

Value Added Tax Act	This law forms the basis for the collection of value added tax in Germany. It specifies what is meant by VATable services, how the tax is calculated and paid, and which transactions are tax-free or subject to a reduced tax rate.
Value Added Tax Implementation Ordinance	The UStDV specifies and supplements the Value Added Tax Act with detailed procedural regulations.
EU VAT Directive	As Germany is a member of the European Union, it must also comply with the provisions of the EU VAT Directive (Directive 2006/112/EC). This directive harmonizes the VAT systems within the EU in order to facilitate cross-border trade and avoid distortions of competition.
Value Added Tax Application Decree (UStAE)	The UStAE contains administrative instructions on the application of the Value Added Tax Act. It serves as a guide for the tax authorities and practitioners to ensure uniform standards in the application of VAT regulations.
Small business regulation	Small businesses must observe special regulations that allow them to be exempt from VAT under certain conditions. These regulations are set out in the VAT Act.
Invoicing regulations	The UStG and UStDV also contain detailed regulations on invoicing, including the requirements for invoices for services subject to VAT. These include details such as the VAT identification number and the tax amount shown.
Input tax deduction	The conditions and procedure for input tax deduction, i.e. the possibility for companies to deduct the VAT invoiced to them from their own VAT liability, are also regulated in the VAT Act.

Companies and entrepreneurs must know and observe these legal provisions and guidelines precisely in order to fulfill their tax obligations correctly and to avoid possible sanctions. It is often advisable to consult a tax consultant or specialist lawyer for specific or complex VAT issues.

Key Questions about VAT answered briefly

What is the difference between VAT and sales tax?

The terms VAT and sales tax are often used interchangeably, but technically describe different perspectives of the same tax system. VAT is a general consumption tax levied on the turnover of goods and services. It is levied at every stage of production and distribution, but with the possibility of input tax deduction for companies, so that the tax is ultimately borne by the end consumer.

The term VAT emphasizes the tax on the added value generated at each stage of the production and sales process. This means that the difference between the cost of purchased inputs and the price at which the final products or services are sold is taxed. This principle is designed to avoid double taxation by allowing businesses to deduct the VAT they have paid themselves on inputs (goods/services) from the VAT they charge on their outputs (their own goods/services).

To summarize: sales tax is the general term for the tax on the sale of goods and services, while VAT specifically describes the mechanism by which this tax is levied only on the additional value created at each stage of production and trade.

How can I check a German VAT identification number?

Hyperinflation threatens when an economy is confronted with a combination of factors that can cause an extremely rapid and uncontrolled increase in the general price level. These include excessive money creation by the central bank, a loss of confidence in the currency, political instability, external shocks such as wars or natural disasters and insufficient production of goods and services.

The verification of a German VAT identification number ("VAT ID") is an important process for companies operating in the European single market. In Germany, this verification can be carried out in several ways, with the online portal of the Federal Central Tax Office being the most common method. Companies can use this portal to check the validity and company affiliation of a VAT ID number easily and efficiently. To do this, users must enter the relevant VAT ID no., whereupon the system provides immediate feedback.

Another option is offered by the European Commission's VIES (VAT Information Exchange System), a tool that has been specially developed for checking VAT registration numbers throughout the European Union. This system makes it possible to check the validity of a VAT registration number throughout the EU, which is particularly relevant for companies that maintain business relationships beyond Germany's borders.

It is also possible to contact the relevant tax office directly to obtain assistance with the check. This can be particularly helpful in complex cases or for specific inquiries. Careful verification of the VAT ID number is essential to ensure that all tax obligations are fulfilled correctly and to minimize the risk of fraud or tax law problems.

Where can I apply for a VAT identification number?

The VAT identification number ("VAT ID") in Germany can be applied for at the Federal Central Tax Office (BZSt). Companies that are active in the cross-border movement of goods and services within the European Union require this number in order to be able to issue VAT-free invoices within the EU. The application can be submitted electronically via the BZSt online portal. Entrepreneurs must prove their tax registration and the need for a VAT ID number, which is usually done by providing their national tax number or entry in the commercial register. After the information has been checked by the BZSt, the VAT ID number is assigned and communicated to the applicant. This procedure ensures that only authorized companies receive a VAT ID number, which supports proper trade within the EU and helps to prevent tax fraud.

Does every company have a VAT ID number?

Not every company automatically has a VAT identification number (VAT ID no.). The VAT ID number is specifically intended for companies that engage in cross-border trade within the European Union (EU). It is used to identify companies for VAT purposes when trading goods and services across national borders within the EU. Small businesses that operate exclusively on a national level and fall under certain turnover limits, as well as companies that do not provide services subject to VAT, may not require a VAT registration number. The decision whether to apply for a VAT registration number therefore depends on the type of business activity, the geographical scope of the company and the legal requirements of the respective EU country. Companies wishing to trade with other EU countries must apply for a VAT number from the relevant tax office or authority in order to participate correctly in the single market.

Who has to apply for a VAT identification number?

The VAT identification number (VAT ID number) must be applied for by companies that are active in the cross-border movement of goods and services within the European Union (EU). This number is required for companies that trade with other EU countries and wish to use or provide VAT-exempt goods or services. It enables the tax authorities to monitor transactions between companies in different EU member states and to ensure that VAT is processed correctly.

In general, therefore, entrepreneurs and companies that want to do business in the EU beyond the borders of their home country must apply for a VAT ID number. This includes both the sale of goods and the provision of services to customers in other EU countries. Small businesses that operate exclusively at a local level and do not exceed the relevant turnover limits do not generally require a VAT number unless they actively choose to participate in cross-border EU trade.