VAT is also known as value-added tax and is called the good and services tax used across the European Union and other regions. VAT invoice applies to goods or services sold as well as other taxable supplies. VAT is also a federal tax raised in almost 170 countries. A VAT invoice is paid by buyers when they purchase goods or services in the EU and other regions.
The Americans do not charge VAT, but each state is always to regulate tax at each inferior level. For this reason, businesses in the USA that sell to customers in the EU should understand how they utilize the received VAT.
What You'll Learn About VAT Invoices
- 01What a VAT invoice is and why it's important for international businesses
- 02Essential components required on every VAT invoice
- 03Step-by-step process for creating compliant VAT invoices
- 04Key differences between VAT and sales tax
- 05VAT registration requirements and quarterly submission deadlines
Understanding VAT Invoices
While Value-Added Tax (VAT) is not directly applied within the United States, understanding VAT invoices and VAT implications is important for business owners across the US who operate internationally and deal with foreign suppliers, partners, or customers.
Definition and importance
A VAT invoice is a document issued by the seller of the goods and services and is a detailed document that reflects the goods and services subject to the value-added taxes. According to the EU tax regulations, VAT invoice requirements have to be issued within 15 days of purchase.
A VAT invoice enables your company to charge EU customers the value-added tax and receive payments for them to remit to the government later.
For businesses in non-European Union countries who sell to customers in the EU, every good purchased into the EU countries should be charged a value-added tax. This is to ensure that every good bought into their country is taxed.
Key components of a VAT Invoice
Step-by-Step Guide to Creating VAT Invoices
In order to charge business value-added tax, you need to follow these steps:
Prerequisites for VAT Registration
Register your company so you can be assigned a VAT number in one of the 28 countries that are members of the EU. You can choose a preferred country where you'd like to operate.
If you understand English, you are advised to register with an English-speaking country. A country like England has English as its official language. To get a Mini One Stop Shop with a tax authority, you choose to get your VAT registered online. This process saves time, especially if you have customers in more than one EU country.
Creating your first VAT Invoice
With that being said, let's get started with creating a VAT invoice from scratch.
Step 1: Confirm customer details
If your transaction is a B2B type, there's no need to charge tax in a simplified vat invoice. The only exception for your accountant is to charge value-added tax when you operate a business-to-consumer trade.
Every European union business should have an assigned number for VAT. If you're dealing with an EU customer, request their VAT identification number and their proof of location, because the VAT rates may vary with countries. You'll be provided with the rates of every country on the EU website.
Step 2: Charge VAT correctly to EU customers
When you have a client with a valid VAT number, there's no need for you to include a value-added tax in their valid VAT registration number requirements. Every company with value-added tax in the EU will be charged, as they are responsible for their own VAT.
Step 3: Issue a VAT invoice
If you have a business outside the European Union and you're dealing with a customer within the EU, you are expected to send them VAT invoices. The full VAT invoices may contain:
Do not be confused as VAT invoice requirements are somewhat similar but different from the sales invoice.
Step 4: On a quarterly basis, submit VAT Returns
As a business owner, you'll need to tender all VAT returns including VAT charged per item to the appropriate regulators every quarter of the year. You can submit them online, or whichever way you want it. You have a deadline of 20 days to pay any outstanding full VAT invoice from each last day along with the rate of vat charged. The quarterly dates for submitting VAT are:
- Q1: April 20, ending March 31
- Q2: July 20, ending June 30
- Q3: October 20, ending December 31
The VAT should be paid in the currency of the tax authorities your business is registered with. For example, if you have a registered business in England, all your VAT returns will have to be converted to pounds. The European Central Bank has standard exchange rates for various foreign currencies.
Purpose of VAT
Similar to the functions of other taxes, the purpose of VAT is to fund the government of the country through the raised revenue and also to facilitate another spending. You must issue value-added tax on goods or services, and as such, it brings income to the government by charging the rate at which a consumer spends. VAT is a federal tax of self-billing and is not easy for customers to evade, unlike some other taxes.
Where Does Value Added Tax Apply?
All countries that make up the European Union are mandated to pay value-added tax, though the rates can vary depending on the EU country. Value-added tax is also charged in other regions of the world. The USA is the sole OECD country that doesn't charge value-added tax at a federal level.
If you need to issue vat invoices, check up the list of countries and the individual rates.
Difference Between VAT and Sales Tax
VAT vs Sales Tax Comparison
| Criteria | VAT Tax | Sales Tax |
|---|---|---|
| Who sets it? | Federal government | State/local government |
| Scope | Same across the nation | Varies between states and local counties in the US |
| When is it owed? | Every stage of the production process | Only at the final retail sale |
| Documentation | Strictly documented and easy to trace | Not as strict as VAT taxes, hard to audit |
The above differentiation is based on the taxing model followed by the government of the United States of America.
Create Professional VAT Invoices Easily
Join 100,000+ contractors using InvoiceOwl to create professional invoices and get paid faster.
Get Started for FreeFrequently Asked Questions
VAT rates vary by country in the EU and usually range from 15% to 25%. It is important to know the specific rate for the country where you are doing business.
Some goods and services, like education, healthcare, and certain food items, may have special rules or exceptions based on local laws. These rules aim to lower the cost of essential items for consumers.
When special VAT rates or exemptions apply, you need to check the specific tax rate for each product or service in that area. Using tax software can help you calculate these amounts accurately.
