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Complete Guide to VAT Calculation (2026)

Value Added Tax (VAT) is a consumption tax applied at each stage of production and distribution. Unlike sales tax (collected only at the final point of sale), VAT is collected incrementally, with businesses reclaiming VAT paid on their inputs. Understanding VAT mechanics is essential for any business trading within or across EU borders.

What Is VAT and Who Must Charge It

VAT must be charged by any business registered for VAT in their country. Registration thresholds vary: the UK requires registration above £90,000 turnover, Germany above €22,000, France above €36,800 for services. Once registered, you must add VAT to your invoices, file periodic VAT returns, and remit the difference between VAT collected (output tax) and VAT paid on purchases (input tax). Businesses below the threshold can often register voluntarily to reclaim input VAT.

VAT Rates Across the EU (2026)

Standard rates range from 19% (Germany, Romania) to 27% (Hungary — the highest in the EU). Most countries cluster around 20-22%: France 20%, Italy 22%, Spain 21%, Netherlands 21%.
Reduced rates apply to essentials like food, medicine, books, and public transport. Some countries have super-reduced rates (e.g., Italy's 4% on bread and milk) or zero rates (UK: 0% on most food and children's clothing).
Outside the EU: UK 20%, Switzerland 8.1%, Norway 25%, Canada GST 5%, Australia GST 10%, Japan 10%.

Split Payment Explained

Under split payment, the buyer (typically a government body) splits the invoice payment: the net amount goes to the supplier, while the VAT portion is remitted directly to the tax authority. This mechanism:

• Prevents VAT fraud (the supplier never handles the tax money)
• Is mandatory in Italy for supplies to public authorities (art. 17-ter DPR 633/72)
• Has been adopted by Poland, Romania, and other EU countries in various forms
• Means the supplier has a permanent VAT credit position (no output VAT to offset input VAT)

Reverse Charge: How It Works

The reverse charge mechanism shifts VAT accounting from the seller to the buyer. The seller invoices without VAT, and the buyer self-assesses the VAT, recording it as both output tax and input tax. This creates a net-zero VAT effect for the buyer while ensuring proper reporting. Reverse charge applies to:

• Cross-border B2B services within the EU (mandatory)
• Construction subcontracting in many EU countries
• Scrap metals and waste materials
• Energy and emissions trading
• Electronics (mobile phones, microprocessors) above certain thresholds

Intra-EU VAT: Step-by-Step

For B2B transactions between EU member states where both parties are VAT-registered:

1. Verify your customer's VAT number through the EU's VIES system before invoicing
2. Invoice without VAT, referencing the applicable exemption (e.g., EU VAT Directive Art. 138)
3. Include both VAT numbers on the invoice
4. File an EC Sales List (Intrastat) reporting the transaction to your tax authority
5. Your buyer self-assesses VAT at their domestic rate via reverse charge

Important: if you cannot verify the buyer's VAT number through VIES, you must charge your domestic VAT rate.

Common VAT Mistakes to Avoid

• Wrong extraction formula: to remove 20% VAT, divide by 1.20 (not multiply by 0.80). €1,200 / 1.20 = €1,000 net
• Missing VIES check: invoicing without VAT on an intra-EU sale requires a valid VIES confirmation
• Applying domestic rate abroad: for B2C digital services to other EU countries, you must use the customer's country rate (via OSS)
• Late Intrastat filing: penalties apply for missing or late EC Sales List submissions
• Ignoring place of supply rules: services are taxed where the customer is established (B2B) or where the supplier is established (B2C)