VAT: A Primer for eCommerce Businesses
Whether you’re just starting your FBA business or you’re so established that you’re getting ready to expand internationally, some things never change. A prime example? VAT confuses just about everyone (even us sometimes, and we’re FBA brokers!).
But don’t let the initial complexity and jargon put you off — we’ll break down the concept as simply as possible.
What is VAT?
In a few words, the Value Added Tax (VAT) is a tax on goods and services — it applies to most items sold, although there are some exceptions. It’s known as a consumption tax, because it falls on consumers and not businesses to pay — although sometimes businesses are the consumer.
See, that doesn’t sound too complicated, right?
VAT is also unique to the European Union, so anything exported or sold abroad is usually exempt. Meanwhile, items imported into the EU from abroad are liable to the tax, because fair’s fair.
How does VAT work?
The next thing most people want to know is exactly what the VAT rate is and how to calculate it. This is where things get a little complicated, because it works slightly differently in every country.
According to EU law, nations must mandate a standard VAT rate of at least 15% and a reduced rate of at least 5% — but individual governments decide exactly what rate to apply and which products to put in which categories.
For instance, Hungary has a VAT rate of 27%, while Luxembourg has a VAT rate of just 17%.
VAT for eCommerce Businesses
Although VAT falls on consumers to pay, businesses have to register for VAT and comply with all the necessary procedures.
Since companies often pay tax on an item at various stages of production and distribution, then charge VAT on the sale of the item too, there are special measures in place to avoid this “double taxation” problem.
Essentially, firms can deduct the tax they paid at all stages before the final sale other than the “value added” at each point — but that’s a job for the accounting and compliance departments.
This is why business invoices always contain a VAT number, allowing companies to calculate their VAT correctly and avoid overpaying. Plus, the consumer then understands how much of a good or service’s price came down to tax.
In some countries, businesses that earn below a certain threshold may be exempt from registering for VAT, allowing them to run their operations without worrying so much about compliance. This ensures that small companies aren’t hit with huge costs.
Putting It All Together
Understanding VAT is an essential building block, but it’s only the beginning of what you need to know to — and sell — your business. Fortunately, if you’re looking to sell, you can enlist help to fill in your knowledge gaps.
At Dragonflip, we want to empower business owners to get the maximum value possible for their firms. To find out more about what we offer, check out our newsletter or head straight to our valuation calculator for to see what your business is worth!