VAT

What does VAT mean? 

VAT stands for value added tax (in Dutch: btw). It is an indirect tax calculated on the turnover of a business, i.e. on each individual sales transaction. Indirect because it is collected as part of the invoice and paid over to the government by the supplier who issues the invoice (so the business owner pays over the VAT portion).

How does VAT work?

Products and some services are usually produced in a chain. Think of a piece of furniture: the raw wood is purchased, then it is sawn at a sawmill, the furniture maker gets to work with it, the raw piece can then go to the upholsterer so that the armchair ends up as a finished product at the wholesaler and then in a furniture shop. Only few businesses carry out all these steps on their own account. Usually, separate business owners take care of each intermediate step, each adding some value. Each in turn invoices the next link in the chain, including VAT. They are all taxable persons who pay over the VAT received to the state. Not all of it, because they may first deduct the VAT that was on their supplier's invoice - the previous link. So ‘on balance’ they pay the VAT on the value they have added themselves.

The VAT actually payable to the state per month or per quarter is the difference between the VAT due, i.e. the sum of the VAT on all invoices issued by a business owner, minus the deductible VAT. The latter is the sum of all VAT amounts on the purchase invoices of that business owner's suppliers. The added value is difficult to determine per item, which is why it is done by reducing all sales by all purchases. The balance is the added value.

VAT return

Every self-employed person and every company is obliged to charge VAT on invoices, apart from a few exceptions. The VAT system described above ensures that at each step only the added value is taxed, because the VAT on purchases and services from previous steps is deducted.

Because every business owner and business files a VAT return, the chain is transparent. The VAT on a sales invoice is VAT owed to the state (a debt); the VAT on a supplier's invoice is deductible VAT, a claim of the business owner on the VAT authorities. The sales invoice is in principle higher than the purchase invoice (or invoices for composite products). The VAT return to the VAT authorities makes that difference clear, so that nobody pays proportionally too much VAT.

Who ultimately pays the VAT?

All companies that contribute to a product pay part of the VAT, but they also recover the part they paid on purchases. In the end, the end consumer bears the full VAT amount. After all, the seller at the end of the chain charges the total selling price. That is the sum of all purchases in earlier links plus the value added by the last seller/supplier. The end user pays VAT on that total amount, without being able to recover it in a link after him/her. VAT legislation is complex, so there are quite a few specific rules and even exemptions from VAT, such as the one for small businesses that do not have to pay VAT over to the government. But they may not deduct the VAT they have paid to their suppliers! You might think that only private individuals pay VAT then? Mainly, but not only. Non-profit associations (VZW), for example, are also not entitled to VAT deduction.