Value-added tax (VAT)
Value-added tax (VAT) is a consumption tax charged at each stage of production and distribution, calculated on the value added at that stage. Registered businesses charge VAT on sales, reclaim the VAT paid on purchases, and remit the difference, so the burden lands on the final consumer. For manufacturers buying across borders, VAT is usually recoverable but still ties up cash and muddies quote comparisons.
Examples
The credit chain: A German machine shop buys steel for €100,000 plus €19,000 VAT at the 19 percent rate, machines it, and sells components for €180,000 plus €34,200 VAT. It remits €15,200: output tax minus the input tax already paid.
Cash at the border: A UK assembler imports £500,000 of castings per quarter and faces £100,000 of import VAT at 20 percent. The tax comes back through its return, but without postponed VAT accounting the company permanently finances about £100,000, roughly £5,000 a year at a 5 percent cost of cash.
Quote comparison: A buyer weighs a €8,400 quote marked exclusive of VAT against a €8,300 quote that turns out to include it. Net of 20 percent tax, the second quote is really €6,917, a difference the first comparison missed entirely.
Definition
The mechanism is a chain of credits. Each business charges output VAT on what it sells, deducts the input VAT on what it bought, and remits the difference, so tax accumulates only on value added. This is unlike US sales tax, which is charged once at the final sale. Standard rates sit near 20 percent in much of Europe, so on manufacturing purchase volumes the amounts are material.
At the border, import VAT is collected alongside duty, typically on the customs value plus duty and freight. The two behave differently and should be modeled differently: duty, including any tariff, is a permanent cost that belongs in total landed cost, while VAT is recoverable for a registered importer and is really a financing cost for the months between payment and refund.
The traps are procedural. Reclaiming requires a compliant tax invoice showing the right registration numbers. Quotes must state whether prices include VAT before anyone compares them. And delivered-duty-paid shipments can leave a foreign seller owing import VAT it cannot recover without a local registration. Each mistake converts a recoverable tax into a real cost of up to a fifth of the price.
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