Value-added tax (VAT)
What is value-added tax (VAT)?
Value-added tax (VAT) is a consumption tax charged on the value added at each stage of production and distribution, collected by businesses on behalf of the tax authority and ultimately paid by the final consumer. A registered business charges VAT on what it sells, deducts the VAT it paid on what it bought, and remits the difference.
VAT is not the same as US sales tax, and the difference matters for anyone selling into both markets. Sales tax is charged once, at the final retail sale. VAT is charged at every link in the chain, and each business in that chain reclaims what it paid, so only the end consumer carries the cost.
For cross-border online sales, the rate is normally set by the country where the customer is located rather than where the seller sits. A single checkout page can therefore apply a different rate to two customers buying the same product on the same day, and the seller owes each amount to a different tax authority.
Key facts
- Formula: VAT due = output VAT charged on sales minus input VAT paid on purchases
- Also known as: goods and services tax (GST) in Canada, Australia, India and Singapore; consumption tax in Japan
- Charged on: the net sale price, added on top, so the customer pays net plus VAT
- Rate determined by: the customer's country for cross-border business-to-consumer (B2C) digital sales
- EU rate floor: standard rates in EU member states are at least 15%, with up to two reduced rates of at least 5%
- Collected by: whoever is the seller of record for the transaction, which on a platform is often the
Key requirements
Compliance breaks into five obligations that repeat in every jurisdiction, even though the numbers behind them differ.
- Register where required. In the UK, registration is mandatory once taxable turnover passes £90,000 over a rolling 12 months, with 30 days from the end of that month to register. Within the EU, a business established in one member state can keep charging its home rate until its combined intra-EU distance sales of goods and cross-border digital services exceed €10,000, after which the customer's rate applies. A business established outside the EU with no EU fixed establishment gets no such allowance for services and registers under the non-Union One Stop Shop (OSS).
- Apply the correct rate. Rates vary by country and by product category, and digital goods are frequently rated differently from physical ones.
- Evidence customer location. Tax authorities expect two non-conflicting pieces of evidence, such as billing address and issuing-bank country, to justify the rate applied. This pulls VAT logic into the payment stack, since much of that evidence arrives with the authorization.
- Issue compliant invoices. The invoice shows the net amount, the VAT rate, the VAT amount and the seller's VAT number. Amounts charged in a foreign currency are converted using an accepted for the supply date.
- File and remit on schedule. OSS lets a seller file one return covering all EU sales instead of registering separately in each member state, which is why it's the default route for businesses selling across the bloc.
A reverses the VAT along with the sale, so the merchant reclaims the VAT already declared through a credit note in the next return. A is treated differently in several jurisdictions because the sale is disputed rather than cancelled by the seller, and the VAT position depends on the outcome of the dispute.
Who it applies to
- Domestic sellers above the threshold. Once turnover crosses the national registration threshold, VAT applies to every taxable supply, not just the amount above the line.
- Cross-border digital sellers. Subscriptions, software, streaming and downloads are taxed in the consumer's country from the first sale for a non-EU supplier into the EU.
- Marketplaces and platforms. Deemed-supplier rules make the platform, rather than the underlying seller, responsible for collecting and remitting VAT on certain sales. Where a or platform acts as merchant of record, that entity carries the VAT obligation and appears on the customer's invoice.
- Business-to-business (B2B) sellers in the EU. Under the reverse charge, a seller supplying a VAT-registered business in another member state charges no VAT and the buyer self-accounts for it. The seller has to validate the buyer's VAT number to rely on this, and an invalid number leaves the seller liable for the tax.
- Payment providers, indirectly. Under , EU payment service providers report cross-border payment data to tax authorities, which use it to find sellers who should have registered for VAT and haven't.
Penalties for non-compliance
- Retrospective assessment. A tax authority can assess unpaid VAT for past periods. Because the tax was never added to those transactions, the merchant pays it out of margin instead of recovering it from customers, so a long unregistered period turns into a single large liability.
- Interest and surcharges on late payment. These accrue per period and vary by jurisdiction, so the cost grows with the length of the gap rather than the size of any single return.
- Exclusion from OSS. Repeated failure to file or pay can remove a seller from the scheme, which forces separate registration, filing and payment in each member state where sales continue.
- Loss of input VAT recovery. Incomplete invoices and records block the deduction of input VAT, so the business absorbs tax it was entitled to reclaim.
- Marketplace suspension. Platforms operating under deemed-supplier rules carry the liability themselves and de-list sellers who cannot evidence a valid VAT registration.
