If you’ve ever done business in Europe, you’re probably aware of the VAT tax and you probably know how to get a VAT number.
But if you’ve never sold a product or service in the European Union (E.U.), don’t let the complexities of international taxation stop you.
Companies who have a business presence in the E.U. can increase their sales and acquire customers who they previously couldn’t reach.
However, if you do business in Europe, your company may or may not be required to apply for a VAT number and apply VAT taxes to products and services sold. In fact, it’s even possible to voluntarily apply for one, even if you don’t meet the strict requirements.
Does your company need a VAT number? If so, how do you apply for one?
First, let’s better understand the VAT tax and the necessity for a VAT number.
Understanding VAT Tax and a VAT Number
A VAT tax is the abbreviation for value-added tax in the E.U. It’s a consumption tax that’s charged incrementally, based on the total value added at each stage of a product or services production. It’s usually levied as a destination-based tax, meaning that the exact tax rate is based on the location of the product or service being sold.
VAT taxes work two ways.
First, a customer or consumer is taxed on the purchase of a product or service within the E.U. This tax is normally shown as a separate line item on an invoice or receipt. Second, businesses are also charged a VAT tax on input materials and services. When this happens, it can receive a credit for VAT taxes paid. This reduces a business’s overall tax burden.
But in order to receive this benefit of VAT tax reduction, companies need to have a VAT number.
A VAT number is a value-added tax identification number and used in many countries, most notably those in Western Europe, to track VAT taxes paid, VAT tax credits, and VAT taxes charged to customers. It’s essentially a tax identifier that allows governments to track the VAT tax activity of businesses who have registered for the VAT tax.
VAT numbers usually start with an ISO 3166-1 alpha-2 country code, followed by two or more numbers, up to thirteen. The identifier is usually composed entirely of numeric digits, although some western countries have VAT numbers that also contain letters. Also, foreign countries outside of the E.U. may have a VAT number starting with “EU”.
Requirements for a VAT Number
Ok, so we know what a VAT tax is and the purpose of a VAT number, but who is actually required to apply for a VAT number and levy VAT taxes on their customers?
First, each country within the E.U. has a minimum VAT threshold. If your business is headquartered within the E.U., it’s a requirement that it applies for a VAT number if annual sales exceed that threshold amount.
However, it’s possible to voluntarily apply for a VAT number even if your business doesn’t meet any of these threshold numbers.
But, this does not apply to companies headquartered outside of Europe. For these foreign businesses, there’s what’s called a “nil-registration threshold” in the E.U. This means that you’re required to apply for a VAT number if you’re doing business in Europe, regardless of total sales.
The only exception is if you run an e-commerce business, which may have special E.U. distance selling VAT thresholds.
Regardless, there are still many benefits of obtaining a VAT number, and even if you’re a tech company, it’s probably best to apply for a VAT number.
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Top Benefits of Applying for a VAT Number
There are many benefits of obtaining a VAT number. If any of the below are of interest to you, it may be a good idea to get a VAT number and start charging a VAT tax.
- Avoid Financial Penalties – It’s not uncommon for a small business’s taxable turnover to inch above the VAT threshold. If this happens to you and you don’t know it, you’ll be slapped with fines and penalties. It’s better to apply for a VAT number before you actually need it.
- Increase Your Company Profile – A lot of international companies aren’t willing to do business with small companies that aren’t VAT certified. To give your business validation and the perception of scale, apply for a VAT number. It will help you do business with larger firms.
- Receive VAT Refunds – VAT registered companies can claim VAT taxes on goods and services they purchased for their business. This reduces your company’s taxable income and saves you money.
How to Get a VAT Number if You’re a Foreign Company
Each country within the E.U. has its own VAT systems. Each of these systems generates a VAT number that covers sales within Europe but outside the country where your business is headquartered.
To help you better understand the registration process, we’ve outlined the steps needed to get a VAT number, using Ireland as an example:
- The first step for non-E.U. companies is to go to the Irish VAT MOSS and start to register.
- Then add your company information and bank account details.
- Once you enter the correct information, enter your personal contact information.
- From there, you’ll be asked about your company’s VAT history.
- After this, the portal will send you to a summary page where you can review all the information you entered. Make sure that it’s all correct.
Well, there you have it.
If you’re a non-E.U. business, you’ll need to apply for a VAT number in order to do business in Western Europe.
So, make sure you understand what a VAT tax is as well as how to get a VAT number, and then apply for your number using the example above.