For businesses and consumers, VAT is an important factor. It is an important source of income for the state and ensures that products become more and more expensive as their value increases. It is not always clear to both businesses and consumers how VAT works. This article explains what VAT is and how it evolved. In addition, the differences to sales tax are shown and the different sales taxes in Germany, Austria and Switzerland are discussed. Last but not least, there are exceptions regarding the VAT obligation.
What is VAT?
According to polyhobbies, value added tax is a tax that is levied when a product is refined . It is one of the main sources of income of the state and is also a traffic control , excise tax , indirect tax , community tax and consumer tax .
The entrepreneur as “helper” of the state
The entrepreneur acts as a “helper” to the tax office when it comes to value added tax (VAT), because ultimately the value added tax (sales tax) is paid by the end consumer. On behalf of the tax office, the company adds the tax to the actual price (net price) and then pays it to the tax office. This means that VAT does not belong to the entrepreneur at any point in time, but rather forms a transitory item in the accounting.
The emergence of VAT
The history of VAT begins with Carl-Friedrich von Siemens. He criticized the practice of levying taxes only on a company’s sales. As a result, large companies were preferred, as they could take over many production steps themselves. In contrast, a product became more expensive the more intermediate steps were carried out for refinement. In order to eliminate this competitive advantage from the world, the value added tax was developed. It now taxes every step that leads to a refinement of a product. Companies have the option of offsetting sales tax and input tax. Get your expenses back. End users do not have this option. The VAT is thus paid by them.
How does VAT actually work?
The simplest way is to illustrate the principle of VAT with an example:
A dealer of office furniture sells a table for 100 euros plus 19% VAT. So the dealer receives 119 euros from the buyer and thus the dealer has withheld 19 euros for the tax office. The dealer must now report this taxed 19 euros to the tax office in his sales tax advance notification and then transfer it to the tax office.
However, this dealer buys a table for 200 euros plus 19% VAT and has thus paid 38 euros VAT. Now the VAT system provides that he can deduct this VAT with which he was taxed (38 euros) from the VAT he received from his customer (19 euros). This system is about the input tax deduction .
This means that he registers 38 euros – 19 euros = 19 euros in his VAT return. Accordingly, he only has to pay 19 euros to the tax office.
Who is subject to VAT?
In principle, all companies are subject to VAT . This means that they show the VAT on their respective invoices and have to pay this to the tax office. However, there are some exceptions to this rule. This affects small businesses , for example . The so-called small business regulation states that certain small businesses do not have to collect and pay VAT. This makes tax work easier for both these companies and the tax office. Despite this exemption, small businesses are required to file a tax return and pay sales tax .
The current VAT principle considers 3 players. The state in the form of the tax office is the one who receives the VAT and earns from it. The companies are the ones who collect and pay the tax on behalf of the state. Ultimately, the end consumers are those who ultimately pay the VAT. However, it would be inexpedient if every single person reported every single purchase to the tax office and transferred the respective VAT. That is why the state has made companies accountable. These must collect the tax and transfer it to the tax office.
The exemptions
Since the VAT system is a very large administrative burden for an entrepreneur, since he has to regularly submit advance sales tax returns, there is a relief provision for small entrepreneurs. This regulation is known as the “small business regulation” and makes it possible to dispense with this complicated calculation.
There are also numerous exceptions to the applicable tax rate. Some of these concern very strange areas. For example, journeys with local public transport (ÖPNV) up to a distance of 50 km only have to be taxed at 7%. As soon as the journey exceeds 50 km, the normal tax rate of 19% applies.
The calculation of the tax rate for milk is particularly curious. This is generally taxed at 7%. However, this only means cow’s milk. As soon as the milk consists of soy or oats or is lactose-free, the standard tax rate of 19% applies. So-called mixed milk drinks are particularly complicated. These must clearly indicate which component predominates in the drink. If it is the milk, the reduced tax rate of 7 percent applies. If, on the other hand, there are other components, the standard tax rate of 19 percent applies.
VAT calculator
It is important for companies to know what VAT is due on their products. This allows the resulting gross price to be calculated from the targeted net price. The gross price corresponds to the net price plus VAT . But VAT is also an important factor for end consumers. After all, it makes the product or service that the respective person want to use more expensive. That is why everyone involved must always calculate the VAT exactly .
A VAT calculator does a good job here. This offers the possibility of calculating the other amount based on a net or gross amount. Such a calculator uses the applicable VAT rates. In Germany these are 19% and 7% respectively. 19% is the standard tax rate applied to most products and services. However, some goods and services are exempt from this standard tax rate. They only have to be taxed at 7%. It is not always clear which products and services these are and which reasons led to the lower tax rate. That is why it often makes sense for many companies to use the services of a tax advisor.
It is extremely important for companies to correctly report VAT in order to have a valid invoice available. This is the only way to file a tax return with the tax office. A VAT calculator helps to find the right tax in each case and to enter the exact values. So you have to deduct the VAT from the gross price in order to arrive at the net price and thus your actual turnover.
In Germany, the terms value added tax and sales tax are often used synonymously. However, this use of the term is misleading without reference to input tax and the possibility for companies to have this reimbursed by the tax office. As a guide, it helps to be aware of the different perspectives of the individual terms. Sales tax is an umbrella term. In contrast, VAT takes the point of view of the consumer, whereas input tax reflects the point of view of companies.
VAT in Germany, Austria and Switzerland
In a European comparison, Germany, Austria and Switzerland are quite consumer-friendly . The VAT rates are below the European average, which means that products and services are relatively less expensive. For activities in other European countries, the tax rates of the country in which the respective company is active must be taken into account. Of course, this also has an impact on invoicing. The sales tax identification number and the note “Tax pays recipient” must then be noted on the invoices.
| Germany | Austria | Switzerland |
| 19.00% | 20.00% | 7.70% |
| 2% below the European average | 1% below the European average | 13.3% below the European average |
| 7% reduced tax rate | 10% reduced tax rate | 2.5% reduced tax rate |
