Value-added tax (VAT) applies in different forms depending on what you’re selling, whom you’re selling to, and where they’re located. The rules governing goods differ from those governing services; cross-border transactions introduce a separate layer of obligations, and registration thresholds vary by country.

Below, we’ll cover when VAT tax is applicable, what activates registration requirements, how cross-border transactions are treated, and what happens if you make a mistake.

Highlights

• VAT is charged at every stage of the supply chain. Each business reclaims the VAT it paid on inputs and remits the rest.

• Registration thresholds differ by country and sale type. Cross-border sales often activate separate obligations with no threshold at all.

• Errors in VAT collection, invoicing, or reporting can result in back-tax assessments, penalties, and disallowed input VAT claims going back several years.

When does VAT tax apply?

VAT is a consumption tax collected throughout the supply chain. Each business charges VAT on its sales and can reclaim the VAT it paid on business purchases. The tax is effectively passed along until it reaches the end consumer, who cannot reclaim it and so bears the full cost.

VAT generally applies when three conditions are met. If any one of them is missing, the transaction might fall outside the scope of VAT or be treated differently under local rules.

These three conditions must be met:

• Taxable supply: The transaction must involve a taxable supply. Generally, commercial activity qualifies, including selling goods, providing services, licensing software, and renting property.

• VAT jurisdiction: The transaction must take place in a country that operates a VAT system. Most economies use VAT or a similar consumption tax—the US is a notable exception.

• Registration status: The supplier must be registered for VAT or required to register. Once a business crosses the local registration threshold, it’s often expected to start charging VAT even if the paperwork is still in progress.

VAT law also divides some transactions into exempt or zero-rated categories.

• Zero-rated supplies: These are taxable, but charged at 0%. Businesses must still file VAT returns and can reclaim VAT on related costs. Common examples include exports, international transport, and, in some jurisdictions, certain essential goods such as basic food or prescription medicines.

• Exempt supplies: These fall outside the VAT system entirely. No VAT is charged, and the supplier usually cannot reclaim VAT on related expenses. Financial services, insurance, education, and healthcare are commonly exempt in many VAT jurisdictions.

You can use a VAT calculator to simplify finding the right VAT rate by country.

How does VAT work across goods and services?

VAT rules apply differently to goods and services. Their divergence surprises many businesses.

Here’s how VAT works for goods and services:

Goods

VAT is usually charged based on where the physical goods are delivered or the supply is deemed to take place under local VAT “place of supply” rules. For example, a UK business selling furniture to a customer in London charges UK VAT.

If that same business sells to a VAT-registered business in France, the sale would be zero-rated as an export. The French buyer would then account for the VAT domestically using the reverse charge mechanism.

Imports introduce another layer. When goods cross a border, import VAT is typically due at the point of entry, separate from any customs duties. Businesses importing goods for resale can usually reclaim this VAT later, but they might need to pay it up-front, which can create a temporary cash-flow gap.

Services

Services are harder to locate geographically, so tax rules rely on “place of supply” principles.

In the EU and many similar systems, the general approach is:

• Business-to-business (B2B) services: Taxed where the customer is established. The buyer usually accounts for VAT using the reverse charge.

• Business-to-consumer (B2C) services: Taxed where the supplier is established, although many categories of services are taxed where the customer is located under specific rules. Digital services are notable exceptions, and services such as SaaS subscriptions, streaming, and digital downloads are typically taxed where the customer lives.

The distinction between goods and services can also appear in software sales. Historically, selling software on a physical disc was treated as a supply of goods, while licenses or subscriptions were treated as services. Many tax authorities have updated their rules to reflect modern distribution models, but differences can still appear across jurisdictions.

What activates VAT registration thresholds?

Many countries set a turnover threshold below which VAT registration is optional. Once a business exceeds the threshold, registration becomes mandatory, typically within a specified time frame.

Examples of thresholds include:

• UK: £90,000 in taxable turnover over a rolling 12-month period

• Germany: €25,000 in the prior calendar year

• France: €93,900 for goods, €41,250 for services

• South Africa: 1 million South African rand (ZAR) in any rolling 12-month period

These two points frequently cause confusion:

• Thresholds are based on revenue, not profit: A business can be unprofitable and is still required to register.

• Voluntary registration is usually allowed: Businesses sometimes choose to register early if they incur higher input VAT or mainly sell to VAT-registered companies that can reclaim the tax.

Cross-border sales might activate separate registration requirements. In some cases, there’s no threshold at all. For example, EU distance-selling rules set at a €10,000 pan-EU threshold for B2C digital and goods sales before VAT must generally be reported to the customer’s member state, often via the EU’s One Stop Shop (OSS).

How does VAT apply to cross-border transactions?

VAT becomes more complex when a transaction involves more than one country. The tax treatment often depends on what’s being sold and whether the buyer is a business or consumer.

Exports of goods

Exports are generally zero-rated in the country of origin, with VAT charged in the destination country. Import VAT is typically handled by the buyer or collected at the border.

If you sell goods directly to consumers in another country, you might need to register and charge VAT in that destination once certain thresholds are exceeded. In the EU, the Import One Stop Shop (IOSS) scheme allows sellers to report VAT on low-value imported goods under €150 through a single registration.

Digital services

Many countries require foreign businesses selling digital services to local consumers to register and charge VAT regardless of where the supplier is based. This applies to services such as software subscriptions, streaming platforms, and digital downloads.

Cross-border B2B sales

Responsibility often shifts to the buyer through the reverse charge mechanism. The supplier invoices without VAT, and the buyer reports the tax on their own VAT return as both output and input VAT.

Without simplified schemes, any kind of cross-border sales could mean registering for VAT in every country where customers are located. In the EU, the OSS scheme allows businesses to register once and report VAT across all member states through a single return.

What are the risks of getting VAT wrong?

VAT errors carry significant financial consequences, particularly when they go unnoticed for long periods. Knowing what happens if it goes wrong will help inform and shape your VAT processes.

Consider the following:

• Undercollected VAT: If VAT should have been charged but wasn’t, the tax authority can assess the unpaid VAT against the business itself. This can apply to several years of revenue, plus interest.

• Penalties: Tax authorities often impose percentage-based penalties that grow with the nature of the error. In the UK, His Majesty’s Revenue and Customs (HMRC) charges penalties for inaccuracies based on whether they were careless, deliberate, or concealed, ranging from 0% for prompted disclosure of a careless error to up to 100% of the tax due for deliberate concealment.

• Disallowed input VAT: If VAT is claimed on purchases that aren’t used for taxable business activity, those claims can be rejected or reassessed.

• Invalid invoices: VAT invoices must contain specific information. Missing details such as VAT registration numbers, tax amount, or sequential invoice number can prevent the customer from reclaiming VAT and raise compliance issues.

• Reverse charge errors: If neither the supplier nor the buyer accounts for VAT correctly on a cross-border B2B transaction, both parties might face assessments and a higher risk of an audit.

How do you know if your business is managing VAT correctly?

Periodic reviews are an effective way to prevent VAT issues. At a minimum, a business should be able to answer the following questions with confidence:

• Registration: Are you registered in every country where your sales activity requires it?

• Rates: Are the correct VAT rates applied to each product or service in each jurisdiction?

• Invoices: Do your invoices meet local VAT format requirements?

• Filing: Are returns submitted on time and reconciled against your accounting records?

• Reverse charge: Are cross-border transactions being reported correctly?

If any of these answers are uncertain, it’s a sign that your VAT process might need attention. Stripe Tax can help identify where collection obligations exist, apply the correct tax rates, and generate tax-ready reports. While they don’t replace specialist VAT tax advice, particularly for cross-border structures, they can reduce the burden of staying compliant.

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Stripe Tax helps you monitor your obligations and alerts you when you exceed a sales tax registration threshold based on your Stripe transactions. In addition, it automatically calculates and collects sales tax, VAT, and GST on both physical and digital goods and services—in all US states and in more than 100 countries.

Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard, or using our powerful API.

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: Let Stripe manage your global tax registrations and benefit from a simplified process that prefills application details—saving you time and simplifying compliance with local regulations.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax, or get started today.