VAT explained: rates, registration and e-invoicing (2026)

VAT (value added tax) is a tax on consumption. Every VAT-registered business adds it to its sales, deducts the VAT it paid on its own business purchases, and pays the difference to the tax authority. The final consumer, who cannot deduct anything, carries the cost. This guide explains how that works in practice for a small business in the UK or Europe: when you must register, which rate to charge, what changes when you sell across borders, how often you file, and what the new e-invoicing rules mean for you. Rates and dates are as of October 2026.

How VAT works: output VAT minus input VAT

Each VAT period you add up two figures:

• output VAT: the VAT you charged on your sales, and
• input VAT: the VAT suppliers charged you on business purchases, backed by valid invoices.

You pay the difference. Say you run a small design studio that charges 21% VAT. In one quarter you invoice €40,000 plus €8,400 VAT. You buy a laptop for €2,000 plus €420 VAT and pay a freelancer €6,000 plus €1,260 VAT, so your input VAT is €1,680. Your VAT bill for the quarter is €8,400 − €1,680 = €6,720.

If your input VAT is higher than your output VAT, for example in a quarter with a large investment, the difference is refunded or carried forward under your country's rules.

How to calculate VAT

There are two calculations you will use every day:

1. 1From a net price: VAT = net × rate. For €1,000 at 21%: €1,000 × 0.21 = €210, so the customer pays €1,210.
2. 2From a gross price: VAT = gross × rate ÷ (100 + rate). For €1,230 at 23%: €1,230 × 23 ÷ 123 = €230, and the net price is €1,000.

Standard VAT rates in Europe in 2026

EU countries must apply a standard rate of at least 15%. They may also apply up to two reduced rates of at least 5%, and a lower or zero rate for a short list of essentials. These are the standard rates in 2026:

Reduced rates: what they apply to

Reduced rates are where most mistakes happen, because the lists are specific and they change. Some examples from the UK, Ireland, the Netherlands and the Nordics:

Always check the exact product, not just the category: a cold sandwich, a hot meal and a soft drink can each carry a different rate in the same country.

When you must register for VAT

Most countries make you register once your taxable turnover passes a threshold, and let you register voluntarily below it. Voluntary registration can pay off if you sell mainly to VAT-registered businesses and want to reclaim the VAT on your costs. A business established in another country usually has to register from its first taxable sale, whatever its turnover.

In the UK, check your turnover at the end of every month: the test is a rolling 12 months, not the tax year. Smaller UK businesses can also use the Flat Rate Scheme (VAT turnover up to £150,000 to join) or cash accounting, where you pay VAT when your customer pays you (estimated turnover up to £1.35 million to join; you must leave above £1.6 million).

The EU SME scheme for small businesses selling across borders

Since 1 January 2025, a small business established in the EU can also use its VAT exemption in other EU countries, without registering in each one:

• its turnover across all 27 EU countries must stay at or below €100,000, this year and last year
• in each country where it wants the exemption, it must stay under that country's own threshold (never more than €85,000)
• it registers once, in its home country, with a prior notification, and receives an identification number ending in EX
• instead of VAT returns, it files one quarterly turnover report
• in return, it cannot reclaim input VAT on the purchases it uses for those exempt sales

Businesses established outside the EU, including UK businesses, cannot use the scheme.

Selling to other countries: reverse charge and OSS

Business customers in another EU country (B2B)

• Goods: when your customer has a valid EU VAT number (check it in the European Commission's VIES tool), you invoice without VAT and the customer accounts for VAT in their own country. Without a valid number, you normally charge your own country's VAT.
• Services: most B2B services are taxed where the customer is established. You do not charge VAT; your customer pays it at their own rate through the reverse charge.
• The invoice must show your customer's VAT number and the words “Reverse charge” or a reference to the exemption, and it is due by the 15th day of the month after the supply. You also report these sales in a periodic list (the recapitulative statement, or EC Sales List).

Consumers in another EU country (B2C) and the OSS

If your sales of goods shipped to consumers in other EU countries, plus your electronic, telecom and broadcasting services to them, stay at or below €10,000 a year in total, you can keep charging your own country's VAT. Above that, you charge the VAT of each customer's country. Instead of registering everywhere, you can declare that VAT through the One Stop Shop (OSS) in your own country: one return per quarter, due by the last day of the month after the quarter (for example 31 October for July to September).

The UK and the EU

Since Brexit, the UK is outside the EU VAT system. UK businesses cannot use the EU SME scheme, and they declare VAT on services to EU consumers through the OSS non-Union scheme. Northern Ireland follows some EU rules for goods. Inside the UK, a domestic reverse charge has applied to most building and construction services between VAT-registered businesses since 1 March 2021.

VAT returns: how often and by when

The deadline usually applies to the payment too, and in the UK and for the OSS it does not move when it falls on a weekend or a bank holiday. Put every due date in your calendar at the start of the year.

E-invoicing: what is changing and when

An e-invoice is not a PDF sent by email. It is a structured file (usually XML, following the European standard EN 16931) that the customer's software and, increasingly, the tax authority can read automatically. The EU's VAT in the Digital Age (ViDA) package, in force since 14 April 2025, lets EU countries make domestic e-invoicing mandatory without asking for special EU permission, and from 1 July 2030 cross-border B2B sales inside the EU will be e-invoiced and reported digitally. Several countries are already there:

If you sell to customers in these countries, ask early how they want to receive invoices. Our guide to what a valid invoice must include covers the invoice details themselves.

Common VAT mistakes small businesses make

1. 1Crossing the threshold without noticing. Track turnover month by month, on the period your country uses, not only at year end.
2. 2Invoicing an EU business customer without VAT without checking their VAT number in VIES first.
3. 3Using the wrong reduced rate. The lists are specific and they change, as Ireland, Sweden, Finland and the Netherlands showed in 2026.
4. 4Reclaiming VAT without a valid invoice. A receipt with missing details may not support your claim.
5. 5Ignoring the €10,000 EU limit for sales to consumers abroad, and charging your home VAT for too long.
6. 6Treating a PDF as an e-invoice in a country where structured e-invoicing is already mandatory.
7. 7Missing the deadline because the books were only ready on the last day.

Keep VAT simple with the right tools

When invoices, expenses and the books live in one system, the VAT return is a by-product of your daily work. Clientlly puts the VAT rates of your organisation's country on every invoice, reads the VAT from scanned receipts, and keeps sales and purchase VAT books per rate, including exports, reverse charge and intra-EU purchases. It prepares VAT reports for you and your accountant, with Excel and PDF exports, and invoices can be issued in multiple currencies. See the accounting module.