The VAT due on any sale is a percentage of the sale price but from this the taxable person is entitled to deduct all the tax already paid at the preceding stage. As explained in VAT on imports and exports, VAT allows for the certainty that exports there are completely and transparently tax-free.

It was evident that if there was ever going to be an efficient, single market in Europe, a neutral and transparent turnover tax system was required which ensured tax neutrality and allowed the exact amount of tax to be rebated at the point of export.

As a consequence, there was always a risk that EU countries would deliberately or accidentally subsidise their exports by overestimating the taxes refundable on exportation. These were multi-stage taxes which were each levied on the actual value of output at each stage of the productive process, making it impossible to determine the real amount of tax actually included in the final price of a particular product.

At the time when the European Community was created, the original six EU countries were using different forms of indirect taxation, most of which were cascade taxes.

paid to the revenue authorities by the seller of the goods, who is the 'taxable person', but it is actually paid by the buyer to the seller as part of the price.

This mechanism ensures that the tax is neutral regardless of how many transactions are involved.

collected fractionally, via a system of partial payments whereby taxable persons (i.e., VAT-registered businesses) deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities.

charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain.

a consumption tax because it is borne ultimately by the final consumer.

However, if the annual turnover of this person is less than a certain limit (the threshold), which differs according to the Member State, the person does not have to charge VAT on their sales.

a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services.

Conversely imports are taxed to keep the system fair for EU producers so that they can compete on equal terms on the European market with suppliers situated outside the Union. Thus, goods which are sold for export or services which are sold to customers abroad are normally not subject to VAT.

It applies more or less to all goods and services that are bought and sold for use or consumption in the European Union. The Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services.

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