VAT Value Added Tax explained

What is VAT? How does VAT work? VAT, or Value Added Tax, is a system of indirect taxation. In this quick VAT tutorial, I will walk you through the concept and definition of how VAT works, run you through a VAT example with a Value Added Tax calculation, and discuss the different VAT categories in use. How does VAT work? What is reverse charge VAT? Find out in this Finance Storyteller video.

⏱️TIMESTAMPS⏱️
0:00 Introduction to VAT
0:20 Basics of a VAT system
1:25 Value Added Tax example
3:43 VAT categories and rates
5:13 Reverse charge VAT

VAT, or Value Added Tax, is a system of indirect taxation. In this quick #VAT tutorial, I will walk you through the concept and definition of how VAT works, run you through a VAT example with a Value Added Tax calculation, and discuss the different VAT categories in use.

VAT is used in around 140 countries in the world. These are the basics of a VAT system:
VAT is a system of indirect taxation on the sale of goods and services to final consumers, in other words VAT is a tax on consumption.
VAT is collected in stages through what is called “the chain of supply”, as you see in the picture on the right. I will illustrate this “chain of supply” concept with numbers in the next part of the video.
VAT registered businesses charge VAT on their sales (this is called output tax) and recover VAT on their purchases and expenses (this is called input tax), and settle the difference with country tax authorities. VAT is not a cost to businesses themselves, they collect and pay it “on behalf of the government”.

VAT rates and rules are subject to change, so check with your local country tax authorities or tax advisor for any country-specific applications of the general idea, and any exceptions to the rule.

The European Union is very well known for having a well-functioning VAT system. Please be aware that although many VAT related legislation is largely standardized across the EU member states, the standard rates differ widely, and what goes into the standard versus the reduced rate category can also differ from country to country.

In this globalizing world with lots of cross-border transactions, how does VAT work in an international context? How about the Dutch training company of your Finance Storyteller that delivers training services in other EU countries? How should he apply VAT?

The main rule is that the place of supply of business-to-business services provided between two VAT-entrepreneurs within the EU, will be the country where the recipient of the services is established.
So does that mean that this training services company has to register for VAT in all EU countries where it supplies its services?
For most companies, fortunately not!
There is solution for this situation and it is called “Reverse charge” VAT!
In reverse charge VAT, there is no VAT on the invoice itself.
The recipient of the invoice self-assesses local country VAT in their monthly or quarterly VAT filing, and deducts that same amount in that VAT filing, effectively leading to a VAT charge of zero, but with two line items.
Both supplier and customer file a separate form of cross-border transactions, detailing “counterpart” VAT number and amount.
That’s how reverse charge VAT works! It greatly simplifies my administrative life.
Here’s what your Accounts Payable staff should look out for when receiving “reverse charge VAT” invoices.
The VAT amount on the invoice should be zero.
The VAT number of the supplier and the VAT number of the (correct) invoiced legal entity are mentioned.
The supplier has mentioned “Reverse charge” (in English) / “Umkehrung der Steuerschuldnerschaft” (in German) / “Autoliquidation” (in French) or “BTW verlegd” (in Dutch) on the invoice.

Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[ariah]

You, Sir, have strung me through my entire college experience. I'm graduating this year!!!! God bless!

[joashimc]

I am in Zimbabwe and have dealt with VAT without understanding for 5 years (so I used the patterns I saw and it has worked until I started to conflict with the reporting manager). I hesitated researching as I often doubted my capabilities but this video got me to understand the first part of our VAT, the impact and also the correct terminology. I am impressed and pleased that it was simple to understand and not an overwhelming amount to review. Thank you! Following and going through more videos to learn!

[izzygarnelo]

Since us Americans have no clue what a value added tax is (like me), this video, along with a couple of others will be getting a lot more attention in the next year or two. With Andrew Yang proposing we use introduce a VAT to help fund UBI, many Americans will be researching videos on VAT and UBI. This is the future.


Yang Gang 2020!!

[BlazinTigger]

Here to learn more about Andrew yangs V.A.T. Plan.

[YR]

Basically sales tax only tax the seller, Vat tax everyone in the production and supply chain.
Also can't tax dodge.
Also Vat is flexible that luxury items like sports car can be taxed at much higher % than groceries.

[Epicedits]

Thanks man I understood everything n how taxes work.

[gabbyokhams]

Good to learn here. I have no idea of reverse charge but got tangible info on being applicale to cross border transactions.

[NorristopianKnifeGuy]

Thank you 🎉 it's years ago but it is still help ful

[TheFinanceStoryteller]

Should every country have Value Added Tax (VAT)? If so, what should governments spend this tax revenue on? Should VAT "replace" other forms of taxation? Let me know by commenting below!

[danielmartin]

Nice video thank, I have a question if you are an intermedia in UK, company that Buy services from other companies to use in Uk and EU the company need to charge VAT to the consumers?

[sigmundhoenigsberg]

Hi, I have come across a new animal called "import VAT" by which I, a consumer, buy a final product abroad, and am charged an "import VAT" at the border (on top of my customs duties).
Isn't that a misnomer?
What exactly is the value added that gets taxed?
..the whole product was produced and sold/bought abroad!

[VSMinecraft.]

If as a retailer if I purchase goods from an xyz distributor, What happens if the xyz distributor is a non-filer of VAT returns. As a retailer would I still get input tax credit?

[prateekwalia]

Do you pay VAT to govt. if you sell digital goods like online courses and affiliate marketing products?

[OmarDelawar]

So why not just charge the 20% tax at the point of sale? Wouldn't that make this much simpler or am I missing something?

[Orf]

1:00 VAT is not a cost to businesses themselves, they collect and pay it on behalf of the government***

[Vospader]

So how is this different from the sales tax system used in America?

[jadebao]

Hello! Thank you for the good explanation, but I still don't understand.
In the end, the government collected 80 euros VAT throughout the transaction. The 80 euros is paid by the four businesses, each paid 20 euros. why say businesses don't pay VAT?

[Heartie_adiepena]

Thank you very much for this course sir. I recently joined a company as an accountant in the Netherlands. the company have an intercompany with baby company in Singapore. so singapore makes a sales to a customer in australia>> NL sends the goods to the client in Australia ( and later invoice singapore intercompany) My question is the courier DHL or Schenker sends NL a tax invoice but when in Australia the courier charges the customer another kind of invoice. the customer now send us this kind of invoice which is only like tax invoice. now in Netherland, I do not know how to book this kind of invoice or how to classify this type of invoice under the tax rules.? Can my company book this type of VAT to claim it from the belastingdienst? and under which tax code is applicable? Thank you for your reaction?

[shuang]

The video says VAT is ultimately a cost to the end consumer, not the businesses. If so, why would Andrew Yang say VAT is the way to get the tech companies to pay for his freedom dividend?

[nullnull]

Doesn't this heavily encourage vertical monopolies?