Value-added tax is also known as sales tax and is one of the main sources of income for the state. With the simple Debitoor invoicing program, you can easily create offers and invoices online. The principle of VAT is very complicated and not easy to understand for many founders. This is particularly due to the many exceptions and constant changes. It is for this reason that this article will consider the rationale. Using the sales tax calculator is essential in this case.
When it comes to VAT, you appear as an entrepreneur as a “helper” to the tax office. Because ultimately the value added tax (sales tax) is paid by the end consumer. As an entrepreneur, you add this VAT to your actual price (net price) on behalf of the tax office and then pay this tax to the tax office. The income from VAT does not belong to you at any point in time: It is just a transitory item in your accounting.
How does the principle of VAT work?
The principle of VAT can best be illustrated with an example:
- Imagine that you are a retailer selling office furniture. To put it simply, we assume that the entire value chain consists of only two stages the manufacturer and you, the retailer.
- The manufacturer makes a table and sells this table to you for 100 euros plus 19% VATS. So you pay the manufacturer 119 euros. The manufacturer has now withheld 19 euros of VAT for the tax office in addition to its price of 100 euros.
- The manufacturer must report these 19 euros to the tax office in his advance VAT return and transfer the amount to the tax office.
- You have a shop with office furniture and sell the table to a private customer for 200 euros plus 19% VAT (38 euros).
- So you have now received EUR 38 VAT from your customer and paid EUR 19 VAT to your supplier (the manufacturer) yourself.
- The VAT system now provides that you can deduct the VAT you paid to your supplier from the VAT you received from your customer. This system is called input tax deduction.
- Input tax is another term for value added tax / sales tax.
You calculate 38 euros – 19 euros = 19 euros for your VAT advance registration. You have to pay 19 euros in your VAT advance payment to the tax office.
Now that the table is with the end consumer, the value chain has ended and we can look at the effects of the VAT principle:
The manufacturer created a value of 100 euros and paid a total of 19 euros to the tax office. As a retailer, you added an additional value of 100 euros to the table and also paid 19 euros to the tax office.