What Is a VAT Number?
VAT number refers to a number used to identify a company that conducts business in areas over which the European Union has taxing authority. VAT stands for value added tax; the tax includes both a general tax and a consumption tax based on a percentage of a given transaction. Each VAT number encodes a wide set of information and includes a set of characters that identifies the company to whom the number was issued.
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Format
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VAT numbers follow a standard format that allows for variation by country. All VAT numbers begin with an identifier code that indicates the country that issued the number. The identifier codes are based on the internationally-recognized country codes established by the ISO (International Organization for Standardization). After the identifier code, a VAT number can have as many as 10 more characters, depending on which country issued the number. Some countries allow for the inclusion of letters as well as numbers in the character string. The information associated with each character or set of characters in the string varies by country, but each country provides a key that indicates what information each character encodes.
Applicable Areas
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Businesses that conduct business in certain parts of the world are required to have a VAT number. The area for which the requirement is applicable includes all European Union member countries, the Isle of Man and Monaco. The European Union maintains a current list of its member countries at its official website, as membership may change.
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Uses
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A VAT number allows the European Union to maintain records of the business activities of businesses that import or export goods in the applicable areas. This information allows for the calculation of the value added tax that a business must pay when doing business. The precise amount of the tax varies by country. In any transaction where the value added tax is gathered, the buyer pays the tax to the seller, just as with other forms of imposed taxes, and the seller is obliged to forward the payment to the corresponding tax collecting entity.
Benefits
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A VAT number allows companies to conduct business in areas where the European Union imposes a value added tax. Corporations that regularly conduct business in those areas are required to have a VAT number even if they are not located in the area. Moreover, if a buyer and seller apply the tax to a transaction in the regular course of business, but the tax is not applicable for some reason, the information associated with the VAT number allows the taxing entity to identify the appropriate entity to which a refund is due.
History
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The earliest implementation of the VAT number was in 1967, when the European Union issued the first directives relating to the value added tax system. The European Union in 1993 made fundamental changes to the way in which the tax functioned. At that time, the European Union proposed a new system of imposing and gathering taxes and set in place a transitional VAT system to allow member countries to move gradually to the new system.
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