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VAT Basics

Basic information about VAT.

Written by Anna Verbichenko
Updated over a week ago

Unlike sales tax, all sellers of goods and services collect VAT at each stage of the supply chain. Suppliers, manufacturers, distributors, retailers, and end consumers pay the VAT on their purchases. Hence if your business is based in the EU or the UK, you have different VAT obligations depending on where you sell and the goods or services you trade.

All businesses that provide "taxable" goods and services and whose taxable turnover exceeds the threshold must register for VAT. You can only charge VAT if your company has a registration for VAT. Check with a local tax authority on an applicable threshold to ensure you charge your customers the correct tax rates and file and remit the taxes correctly.

For EU-based companies, VAT is chargeable on most sales and purchases within the EU. It could also include each stage of a production process, e.g., buying components, assembly, shipping, etc. EU member states can apply reduced VAT rates and exempt certain goods and services.

Online traders based in the EU and selling goods online to European consumers must consider distance selling rules. Distance sales are goods dispatched to a private consumer in another EU member state where the supplier is responsible for delivery. Distance selling rules enable you to sell cross-border to customers within the EU until set thresholds are met. Before the thresholds are met, you will apply the outbound country's VAT rate on your sales. Once you exceed the buyer's country threshold, you must switch to that country's domestic tax rate and ensure you are VAT-registered in that member state. Please pay attention to this when setting up taxes in X-Cart.

VAT is not charged on exports to countries outside the EU. In this case, the VAT is paid in the country of import.

There are three different VAT rates for UK-based companies, and you must ensure you charge the right amount. Most goods and services are standard-rated. You must charge this rate unless the goods or services are classed as reduced, zero-rated, or tax-exempt.

All EU and UK VAT-registered businesses must produce VAT invoices for the supply of goods or services that include at least the following data:

  • VAT number of the supplier;

  • Rate of VAT charged (if items are charged at different VAT rates, then show this for each item);

  • The total amount, including VAT (if items are charged at different VAT rates, then show this for each item).

X-Cart uses a simplified type of invoice that includes the data mentioned above.

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