What is VAT Return Services?
A VAT return is a declaration of taxable transactions within a particular taxable period, which is either monthly, quarterly, or annually.
The VAT return has several components:
- Input tax
- Output tax
- Exemptions
This information is what you need to compute how much VAT you need to pay (or refund) from the tax authorities.
Input Tax
Input VAT is the VAT added to all your purchases of goods and services from a VAT-registered business. That means as a retailer, you pay input VAT when you get your products from your distributor or supplier.
For example, your t-shirt printing business purchases textile ink from a VAT-registered supplier. The VAT you pay for the textile ink will be recorded as input tax in your VAT return submission.
Input VAT is reclaimable only if you are VAT-registered. This way, it will not be a cost to your business.
Since July 2021, being VAT-registered includes being registered in the OSS, IOSS, or Non-union OSS VAT schemes.
Output Tax
Output VAT is the VAT you charge and collect from your customers if you are VAT-registered. This means that you add VAT to the cost of your product and your consumers pay it during sales transactions. The VAT rate you add should correspond to your customer’s shipping address (destination VAT). Rates differ per EU member state.
If your business is not VAT-registered, you should not be charging VAT.
Tip: To help you remember the difference between input and output VAT, input VAT is VAT for goods coming into your business (supplies), while output VAT is VAT for goods sold or going out (sales).
Reduced Rates
Governments may allow reduced VAT rates for some items for the benefit of low-income households. Items such as some items of food, water and water supplies, and public transport typically have reduced VAT rates depending on the EU country.
For example, the Czech Republic typically applies a rate of 21% VAT for consumer items. However, items such as children’s car seats, admission to shows and fairs, and social services are assigned a reduced rate of 15%; while newspapers, some baby food, and books also have a reduced rate of 10%.
Another example: in Italy, a reduced rate of 10% is levied on selected electric power supplies. Five percent (5%) is the rate for certain water transport services and food herbs, while 4% is the reduced rate for some food, drinks, and agricultural items.
To find out which items in your member state have reduced rates, refer to your country’s tax authorities or Munshian’s tax experts.
Coronavirus-related reduced rates. During the pandemic, some EU member states reduced VAT rates for additional items it determined were essential. This temporary VAT regime for a fixed period. Some countries even reduced VAT rates for all goods and services.
Such is the case for Germany where tax authorities decided to slash VAT rates from 19% to 16% across the board, and reduced rates were further cut from 7 to 5% from 1 July 2020. The temporary rates were in effect for six months.
Exemptions
Some items should not appear in your VAT return submission because they are exempted from VAT.
Examples of VAT-exempt items are health care, education, and financial and insurance services.
Different EU member states have different items that are exempt from VAT. Check with your country’s tax authorities for listings as they are constantly changing.
Sellers of exempt items are not entitled to reclaim VAT on supplies (business purchases).
Zero-rated items
Don’t mistake exemptions for zero-rated items. The latter (zero-rated) just means that there is VAT for the item, but for now, the rate is 0%. Examples of these are books and newspapers.
Zero-rated items are still recorded in your VAT returns as they are considered taxable items (not exemptions).
The difference between VAT exempt and zero-rated VAT is that sellers of zero-rated items are entitled to reclaim VAT on supplies or business purchases.
Out of scope items
Out of scope items are those that are sold to you by a non-VAT-registered business. There are also items that are non-VATable such as public road toll fees, staff wages, and donations to charities.
Out of scope items are not included in the VAT return submission at all.
How to Compute for VAT Payable on Your VAT Return
VAT payable is money you owe the tax authorities.
The formula for determining VAT due is output tax less input tax equals VAT payable.
For example, your total output tax amounted to €4141, and your input tax €2319.
Therefore: 4141 – 2319 = €1822, where €1822 is your VAT payable or VAT due.
If you are registered in any One-Stop-Shop scheme (OSS, IOSS, MOSS, etc), the online form will only ask for the output tax, and that is your VAT payable for that quarter. You should file your VAT return online through the portal. The portal should give you specific instructions in your language. And your single payment will be dispersed by the scheme to all relevant EU member states.
Therefore, in the One-Stop-Shop portal where you are registered, your VAT payable should be €4141.
Since the introduction of the different VAT schemes on 1 July 2021, your quarterly VAT return online should be filed by October. This should cover the months of July, August, and September.
If you are not registered in any OSS scheme, you must file and pay your VAT returns in every relevant EU member state separately.
Munshian Makes VAT Return Submission Easy
We have made the concepts of VAT easier for you to understand, but this is just the tip of the iceberg. VAT is a complex subject compounded further with the new set of rules that each EU country interprets. This does not discount the fact that every VAT-relevant transaction of yours should be recorded properly to ensure correct VAT return submission.
Otherwise, you may have to answer to the local tax authorities for mistakes or miscalculations. This may hamper your success as a business.
