Value Added Tax is applied across the entire European economic community. (Photo: Photodisc/Photodisc/Getty Images )
A VAT number, properly called a VAT Registration Number, is an alphanumeric identifier -- consisting of up to 15 characters -- unique to any corporate entity doing business in a European Union country that implements the Value Added Tax system. At time of publication, EU law mandated the standard rate of VAT as at least 15 percent. Member states individually determine their own specific rates at or above that figure.
Value added tax is a general, broadly-based consumption duty that is calculated as a percentage of price. It is assessed on both goods and services used or consumed within the European Union. Goods sold for immediate export from the EU and/or services purchased by foreign customers are normally not subject to VAT. Imports to the EU, however, are taxed; this is to keep the playing field level for EU producers within the European market who are in competition with suppliers not located in a member state. The rate and sums of VAT are calculated in accordance with the appropriate regulations in force at the time of any transaction.
History of VAT
VAT was originally implemented in the United Kingdom in 1977. The legislation was modified piecemeal many times in the following decades, particularly as the European Economic Community grew and evolved. In 2007, EU Directive 2006/112/EC formalized those modifications into a new overview of the legislation current at that time.
Entities Who Pay VAT
VAT applies with few exceptions to
any commercial activity, including but not limited to the provision of services, the production of goods and the distribution of goods. It is a consumption tax, meaning that it is borne by the end user; although any number of intermediaries may pay VAT on a product as it moves along its distribution pathway, these intermediaries claim the tax back as part of their accounting procedures. The only party that cannot claim the tax back is the end user.
Businesses That Should Have A VAT Number
Any North American business conducting business in a VAT country should apply for a VAT number. "Conducting business" does not necessarily mean making sales or purchases of real goods; it is also incumbent upon shippers of goods and organizers of trade shows and conferences to apply for a VAT number. This is a legal requirement of any corporate entity, but company officials should also be aware that -- with a VAT number of its own -- a company is eligible to reclaim any VAT charged on its invoices unless it is an end user. Being given a VAT number imposes certain responsibilities on the company, such as -- but not limited to -- the filing of regular VAT returns.
How to Know Where the Buyer or Seller is Based
The member state of the European Union in which the business is registered dictates the first two characters of the alphanumeric identifier, which are always letters; DE indicates Germany, for instance, DK indicates Denmark, EL indicates Greece and GB indicates the United Kingdom.
Exceptions to the Attachment of VAT