With the notable exception of the US, most countries, including all members of the EU, have a value-added tax (VAT) or goods and services tax (GST) system. If your business sells goods or services in any country that has VAT, you need to be VAT-compliant. This can get complicated when you’re selling across borders, dealing with multiple product categories, or crossing registration thresholds in more than one country. In 2023, the EU’s VAT gap (the amount of VAT legally due but not remitted because of noncompliance, errors, or insolvency) was €128 billion.

Below, we’ll explain how VAT taxes work, how VAT differs from US sales tax, how cross-border selling affects compliance obligations, and how to decide which parts of VAT compliance to outsource and which to handle in-house.

Highlights:

• VAT is collected at every step of the supply chain. Registered businesses charge it on sales and reclaim it on purchases, and the final consumer pays the final cost.

• VAT registration thresholds vary by country. Crossing one triggers a mandatory filing obligation, often within 30 days.

• Many businesses that sell across multiple jurisdictions use a combination of automation and specialist advisers to handle VAT compliance.

What is VAT tax compliance?

VAT is a consumption tax collected at every step of the supply chain. Each business in the chain charges VAT on what it sells and reclaims VAT on what it buys. The consumer ends up paying the full cost, but the tax gets collected in increments along the way.

How do VAT taxes work in the supply chain?

Each business in the supply chain charges VAT to its customers and pays VAT to its suppliers. The difference between what you collected and what you paid is the amount you remit to the tax authority.

Here’s how it works:

• Output VAT: When you sell a product or service, you add VAT to the price at a rate that depends on the country and type of good or service. You collect this VAT from your customer and pass it on to the tax authority when you file your VAT return.

• Input VAT: When you buy goods or services for your business, your supplier charges you VAT. If your business is VAT-registered, you can reclaim the amount you paid by reporting it, subtracting it from your output VAT liability, and settling the difference. If your input VAT exceeds your output VAT in a given period, the tax authority typically owes you a refund.

What are VAT registration thresholds?

Many countries set a revenue threshold for VAT registration. Once you cross it, registration becomes mandatory, usually within a short time window. In the UK, for example, this threshold is £90,000 in VAT-taxable turnover over any rolling 12-month period. If an EU-based business is selling goods to consumers in other EU countries, the EU’s One Stop Shop (OSS) system has its own threshold: €10,000 in annual cross-border business-to-consumer (B2C) sales across the EU.

If your revenue is below the relevant threshold, you don’t have to register, but you might choose to anyway. Registering lets you reclaim input VAT, which is helpful if you’re spending heavily on supplies or equipment.

Some countries don’t have thresholds and require that you register as soon as your business has a taxable transaction.

How does VAT tax compliance differ from sales tax compliance?

Sales tax (used in the US) is charged to the consumer only once, at the final point of sale. VAT runs through every link in the supply chain, which creates obligations for businesses at each stage.

Here are some key differences:

• Who pays at each stage: Businesses buying from other businesses for the purpose of reselling or manufacturing generally don’t pay sales tax at all. Instead, they use exemption certificates. With VAT, every business in the chain both pays tax and reclaims it, which means more transactions to track and more filings to manage.

• Reclaiming input tax: VAT-registered businesses credit the VAT paid on all their business purchases against the VAT collected on sales. Fewer deductions exist for sales tax paid on business inputs because businesses don’t pay sales tax unless they’re considered the end consumer.

• The rates and rate structures: Sales tax rates in the US vary by state, county, and sometimes city, with thousands of distinct jurisdictions. VAT rates are set nationally, which makes the rate structure simpler.

How does selling across borders change your VAT tax compliance obligations?

VAT is generally charged where your customer is rather than where you are. That’s why cross-border compliance is important.

Consider the following:

• B2B vs. B2C sales: When you sell to consumers (B2C), you’re usually responsible for charging and remitting VAT yourself. When you sell to a VAT-registered business in another country (B2B), the reverse charge mechanism typically applies. The buyer accounts for VAT in their own jurisdiction rather than remitting it through you.

• The EU’s OSS system: Under OSS, you can register once in one EU member state, then file a single return that covers all of your EU B2C sales. You still need to apply the correct local VAT rate for each country, but you don’t have to maintain registrations across 27 member states.

• Selling digital services: Many major VAT jurisdictions now require nonresident businesses to register and charge VAT on digital services they sell to local consumers. This obligation often starts from the first sale rather than being tied to revenue. If you’re selling software, streaming, downloadable content, or online courses globally, you might have registration obligations in dozens of countries.

• Import VAT on physical goods: When goods cross a border, import VAT is typically due at entry. Depending on how your shipping is structured (e.g., who’s the importer of record, what International Commercial Terms apply), this can fall on you or your customer.

What are the risks of poor VAT tax compliance?

Getting VAT wrong can be a financial problem. The longer mistakes go unaddressed, the more the penalties compound.

Here are some potential consequences:

• Back taxes and interest: If you’ve been selling into a country without registering or charging VAT, you’re likely liable for the VAT that should have been collected, plus interest.

• Penalties for late registration and filing: Many countries impose penalties for late VAT registration and additional charges for late returns or payments. Operating across multiple jurisdictions multiplies this exposure.

• Input VAT disallowance: If your records don’t meet the required standards, tax authorities can disallow your input VAT claims. You then lose the reclaim you were counting on.

• Audit exposure: Poor compliance history flags your account. An audit in one country can trigger scrutiny in others if you’re operating across borders.

• Customer unhappiness: If you invoice B2B customers incorrectly (for example, with the wrong VAT treatment, missing VAT numbers, or incorrect rates), you create problems for their own compliance, which can damage your relationship.

Is VAT tax compliance something your business can manage in-house?

Whether your business can manage VAT compliance on its own depends on where you sell, what you sell, and how your finance team is structured.

If you’re selling only in your home country and below a single registration threshold, in-house management is possible. You just need a reliable accounting system, disciplined record-keeping, and a solid grasp of filing requirements.

If you’re operating across borders, it can be difficult to manage VAT on your own. Rates, rules, and deadlines differ in each country, and the treatment of specific product categories isn’t consistent. Automated tools such as Stripe Tax handle the mechanical side of compliance by automatically calculating rates, generating records, and applying the correct VAT treatment.

Meanwhile, human specialists should handle registration, filing, and anything requiring judgment calls, such as how a new product category should be classified or whether a new market triggers an obligation.

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.