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*
19.00
—————–
Total paid to the vendor (C)
119.00

 

Sale to a German customer (B)
Computer parts
Euro 200.00
19% VAT**
38.00
—————–
Total collected from the customer (B)
238.00

*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
38.00
Less VAT paid to vendor
(19.00)
—————–
VAT due to German tax authorities
19.00

Company(A) margin:

Revenue from customer (B) (less VAT)
200.00
Less paid to vendor (C) (less VAT)
(100.00)
—————–
Margin
100.00

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