Entrepreneur’s Guide to Lowering VAT Obligations in Europe

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The value added tax is a consumption tax that is used in most European countries. It is similar to the United States sales taxes in some ways, but it is also farther reaching and has a bigger impact on business owners.

VAT Obligations

Shutterstock Licensed Photo – By farland2456

As a business owner, you need to understand what the VAT tax is and how to minimize your liability under it. Is important to take all necessary steps to keep it as low as possible, so that you don’t end up getting bankrupted by unnecessary fees. We spoke with VATIT to learn more.

How does the VAT tax work?

The government charges businesses a tax on all consumption for revenue exceeding the allowable threshold. This threshold is different in every country. However, for the sake of argument, we will use the figures and post by the United Kingdom. In 2018, businesses will be subject to the value added tax if they have revenue over £85,000 in a calendar year.

These businesses will need to take the following steps:

  • They will need to speak with the tax authority in their country and register as a VAT company.
  • They must start charging this tax on all applicable purchases. In the United Kingdom, this means that they need to charge a 20% VAT tax on all purchases if they have revenue over the allowable guidelines.
  • The company must file a return with the national tax authority according to legislative timetables. In the United Kingdom, this means that they must file a return with Her Majesty’s Revenue Collection every three months.

At first glance, this system seems very straightforward. However, there are actually a number of nuances that complicate things. This means that some businesses are going to end up paying more than others. Businesses need to understand the specifics to make sure they are not overcharged.

Tips for making sure that you don’t Pay too much for VAT

There are a number of ways that you can lower your liability. Here are some things to be aware of.

Find out if your company is exempt from having to pay the tax

Many businesses mistakenly believe that they automatically are required to pay a VAT tax as soon as they register their company. They don’t recognize that there are actually a number of exempt goods and services. To make things more depressing, they often don’t properly classify their business, so they are never alerted to the fact that they were charging tax for a service that they shouldn’t have. Not only does this mean that they could be turning away customers by artificially raising prices for the added tax, but they might get in trouble for charging a tax they weren’t supposed to.

It is very important that you know which goods and services are VAT exempt and make sure that you don’t charge for them. Here is a partial list of exempt products and services:

  • Financial services, including most insurance plans
  • Educational and vocational training services, even if you are a for-profit company
  • Any activities linked with a charity
  • Paid subscriptions for participating in a trade group or professional organization
  • The sale of commercial real estate

You need to make sure that any services you sell in these groups do you not have the tax tacked onto them.

Realize that you might not have to pay VAT if you are an affiliate

One of my friends from the United Kingdom is an affiliate marketer. He ran into a problem with advertising on Bing ads. They told him that he was supposed to be paying the VAT tax. He had to register with his tax authority, but was able to explain that he is an affiliate marketer. This method he was exempt, because he was not the actual sales person. He is just a middleman and not responsible for the tax.

Make sure you understand the details to avoid paying unnecessary taxes

The VAT tax is one of the more complicated aspects of running a business in United Kingdom. You’re going to need to make sure that you understand the policies and avoid paying taxes that you don’t need to. Hopefully, this guide will be a help.

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Ryan Kh is a big data and analytic expert, marketing digital products on Amazon's Envato. He is not just passionate about latest buzz and tech stuff but in fact he's totally into it. Follow Ryan’s daily posts on Catalyst For Business.