How VAT Works

By | July 17, 2016

VAT rules can be very complicated and differ from country. Below is an illustration of the VAT and money flow in the simplest of transsactions.

Sample Germany

A German company (A) purchases and sells computer products from and to German companies. Below is a description how the VAT tax works for this company (A):

Purchase from a German vendor (C)
Computer parts
Euro 100.00
19% VAT*
Total paid to the vendor (C)


Sale to a German customer (B)
Computer parts
Euro 200.00
19% VAT**
Total collected from the customer (B)

*VAT is not a cost to the company(A). It is accounted for on a Balance Account.
**The customer(B) can deduct the VAT if they are a company, registered for VAT. Their cost is then 200.00.

VAT Return filed to the German Tax Authorities
The German company(A) declares to the German tax authorities:

VAT collected from the customer
Less VAT paid to vendor
VAT due to German tax authorities

Company(A) margin:

Revenue from customer (B) (less VAT)
Less paid to vendor (C) (less VAT)

The company’s Profit & Loss is not affenly the cash flow.