Industry Insights · 17min read
VAT for Businesses in the EU
Familiarise yourself with the ins and outs of value-added tax for your food business.
Table of Contents
- What is VAT?
- What are VAT IDs?
- Applying VAT
- A Checklist
- EU VAT: Domestic Flow of Goods and Transactions
- EU Reverse Charge: Domestic Flow of Goods, Cross-Border Transactions
- EU Intra-Community: Flow of Goods and Transactions Between Two Member States
- EU Triangulation: Flow of Goods Between Two Member States and Transactions Between Three Member States
What is VAT?
From buying and transporting ingredients to producing, packaging and shipping foods, Value Added Tax (VAT) is a consumption tax that is applied to (almost) all physical and digital goods and services sold along any stage of the supply chain in the European Union (EU). The VAT system was introduced into the EU single market to help simplify taxation and help businesses and consumers avoid double taxation.
While the EU regulates general VAT schemes, VAT application and rates (a fixed percentage of the sale above 15% for general rates and above 5% for reduced rates) differ between member states, giving way to a string of complexities—particularly when goods or services move between countries. In 2022, in Germany, the standard VAT rate was at 19% and the reduced rate at 7%. In Italy, 22% and 10%/5% and in France 22% and 10%/5.5% respectively apply.
An overview of the cases where reduced rates may apply can be found in Annex III Article 98 of the EU Directive 2006/112/EC (VAT) and include foodstuffs, water supplies, pharmaceutical products, medical equipment, transport of passengers, cultural experiences, consumption of media, admission to sporting events and more.
What are VAT IDs?
All VAT identification (VAT ID) numbers begin with the country code, or national identifier, followed by a series of maximum 12 digits (sometimes also characters). Nevertheless, every member state uses its own VAT identification number structure. To give you an example, foodcircle’s German VAT ID is DE 323821929 and Italian VAT is IT 00244659991. It should be noted that your VAT ID is different to your EU tax number as well as your EU tax identification number.
VAT IDs are used on invoices and help identify the tax status of a customer as well as define the place of taxation. All businesses trading, transporting and storing goods and exchanging services within the EU are required to obtain a VAT ID to ensure accurate taxation and avoid tax fraud. As such, checking a prospecting customer’s VAT ID is a good way to help validate the credibility of their business.
An exception for VAT ID requirements exists for small enterprises—if the goods or services you are trading do not cross a certain annual threshold, you may be eligible for VAT exemption. Again, this threshold is subject to change and differs between member states, so it is important that you always consult your local tax authority before omitting VAT from your invoices to avoid unhappy surprises down the line. A comprehensive overview can be found here.
In every member state, the respective Ministry of Finance and/or tax administration is responsible for issuing local VAT IDs. A comprehensive overview of the authorities for each member state can be found here. Please contact your local tax authority to apply for a VAT ID and inquire about filing and payment requirements.
To establish which VAT rate to charge for your goods or on your services, it is important to clarify the following questions:
Are you a VAT registered company?
Is the transaction (i.e. your customer) B2B or B2C?
Which VAT scheme is applicable for your transaction (e.g. reverse charge, triangulation) and in which country?
What is the correct VAT rate for that country and those specific goods/services?
If you are unsure about any of the above, we recommend seeking counsel from your tax advisor or local tax authority. At foodcircle, our Sales Team is always happy to advise you about VAT requirements for our digital financing services.
Below, we have outlined some of the cases that we encounter on a regular basis with foodcircle suppliers and customers.
EU VAT: Domestic Flow of Goods and Transactions
The perhaps simplest form of VAT transaction is a domestic transaction in which all parties are registered and operative in the same member state. In this scenario, each business has a registered VAT ID within that member state. When a transaction is made, the supplier charges the applicable VAT rate to their invoice, which the customer then pays. The supplier carries the responsibility for accounting for this tax with the local tax authority. In a similar manner, the supplier can deduct VAT on purchases they have made. In cases where the VAT deduced is higher than the VAT charged, the supplier will be reimbursed or credited by the local tax authority. A comprehensive overview of invoicing rules that apply can be found here.
The diagram above illustrates the flow of VAT for ingredient suppliers and food customers that work with foodcircle. This rule applies for scenarios in which the supplier and customer are based in Germany, Italy or Bulgaria as foodcircle has VAT IDs registered in these three member states.
EU Reverse Charge: Domestic Flow of Goods, Cross-Border Transactions
The VAT Reverse Charge Principle (RCP) was implemented over two decades ago in the EU to help simplify trade and taxation. The VAT RCPs are implemented slightly differently in individual member states. Generally speaking, RCP is a mechanism that deviates from the standard rule of charging VAT on supplies or provision of services and deducting VAT on purchases or use of services. In scenarios where RCP is applicable, VAT is not charged on the invoice. Instead, the business receiving the goods or service is responsible for calculating and initiating the payment and deduction of VAT directly via their VAT return —this is known as input VAT and output VAT.
The diagram above illustrates the application of VAT RCP for ingredient suppliers and food customers that work with foodcircle. VAT RCP can be applied to transactions in cases where both the supplier and customer are based in France, the Netherlands, Belgium, Poland and Spain.
EU Intra-Community VAT: Flow of Goods and Transactions Between Two Member States
When businesses supply goods or services from one member state to another, intra-community supply (ICS) and intra-community acquisition (ICA) apply. In this scenario, the supplier generally does not apply VAT to their invoice via ICS and the customer is required to self-account for their ICA VAT according to RCP.
The diagram above illustrates the application of ICS and ICA for ingredient suppliers and customers that work with foodcircle. It should be noted that intra-community VAT is only applicable if the shipment is organised by foodcircle or the customer. In cases where the shipment must be organised by the supplier, triangulation applies (see below).
EU Triangulation VAT: Flow of Goods and Transactions Between Three Member States
The EU law of triangulation is a subcategory of intra-community transactions that regulates and simplifies cross-border flows of transactions between three businesses and member states, while the flow of goods takes place between two. Triangular transactions seek to avoid taxation complications of businesses needing to apply for VAT IDs in multiple member states to do business within the EU. For this, all three businesses must be registered as VAT traders in their respective member states. A zero-rated ICS VAT and ICA VAT apply. The receiver of goods accounts for the transaction in its VAT return as a received supply, thereby accounting for the intermediary’s VAT liability. A comprehensive breakdown of the various scenarios that are applicable can be found here.
The diagrams above illustrate the application triangulation VAT to transactions between ingredient suppliers and customers that work with foodcircle. Generally, the shipment must be organised by the supplier or foodcircle for triangulation to apply. If foodcircle organises the shipment, the scenario illustrated in the first diagram is applied. If the supplier organises the shipment, the scenario illustrated in the second diagram is applied.
Regardless of where or with whom you are doing business, you are responsible for the accuracy of your record-keeping and filing returns for your businesses. The former will be subject to new obligations and requirements from 2024 onwards.
Liability note: Please note that foodcircle does not assume any liability for the information and sources provided in this article. We compiled this overview to help break down the complexities of the EU-VAT sphere for food businesses. All information provided is subject to change at any given time and foodcircle is not responsible for updates. Please consult your tax advisor or local tax authority before using any information provided in this article to guide your business decisions.
Imagery: (1) Charles Deluvio & (2) Andrew Neel via unsplash.com | Diagrams: (1) - (5) via foodcircle.com