What is VAT? How does VAT work?

What is VAT?

VAT stands for Value Added Tax. It is a consumption tax charged to Amazon sellers for most goods and services sold in the UK and EU.

VAT is similar to sales tax in the US, in which sellers must collect and remit to state tax authorities where they have a nexus.

How does  VAT work?

Every country in the EU has its own VAT rules. But here’s how it usually works:

▪️When a manufacturer buys raw materials, they pay VAT on the purchase.

▪️When they sell their finished product to a wholesaler, the wholesaler pays VAT.

▪️The wholesaler then pays VAT when they sell the product to a retailer.

▪️Finally, the retailer charges VAT to the end consumer when they purchase the product.

Each business collects sales VAT and remits it to the respective country’s tax authority. They can also reclaim the VAT paid on business expenses. This input VAT is deducted from the output VAT collected.

For example:

▪️A manufacturer pays £100 in VAT on raw materials.

▪️They sell the finished product to a wholesaler for £500 + £100 VAT.

▪️The wholesaler has £100 VAT to remit but can deduct the £100 input VAT.

▪️Net VAT payable by the wholesaler is £0.

So, while consumers ultimately pay the VAT, it passes through the entire supply chain with businesses responsible for collecting, reporting, and remitting applicable VAT.

VAT registration is required in each country where a business has a taxable presence based on factors like inventory, storage, company registration, distance sales thresholds, and more.