VAT - How to calculate the correct VAT! Read more here
Learn all about VAT and how proper VAT registration and reporting can help your business comply with legislation and optimise your financial processes. Get to grips with the VAT rules for online stores
Everything you need to know about VAT: Calculation, settlement and examples for webshops and businesses
What is VAT?
VAT, also known as Value Added Tax, is an indirect tax applied to goods and services in many countries worldwide. In Denmark, the VAT rate is typically 25%, though there are reduced rates for certain goods and services.
Introduction to VAT
VAT stands for Value Added Tax and is an indirect tax collected by businesses on behalf of the government. Businesses add VAT to the price of the goods and services they sell and then remit this VAT to the tax authorities. In this way, consumers are the ultimate payers of VAT, even though businesses are responsible for paying it to the government.
VAT in accounting
In accounting, VAT plays a crucial role in both sales and purchases. When a business sells a product or service, it must charge VAT to the customer and then report and pay this VAT to the tax authorities. At the same time, the business can deduct the VAT it has paid on its own purchases (input VAT) from its VAT report. This is called a VAT deduction.
Example of VAT calculation in practice
To illustrate how VAT is calculated in practice, let’s consider an example of a webshop that sells electronics:
Suppose your webshop sells a laptop at a price of 8,000 DKK excluding VAT. The VAT rate is 25%.
To calculate the sales price including VAT, you should do the following:
Sales price including VAT = Sales price excluding VAT * (1 + VAT rate)
In this case:
Sales price including VAT = 8,000 DKK * (1 + 0.25) = 8,000 DKK * 1.25 = 10,000 DKK
Your customer will therefore pay 10,000 DKK for the laptop, of which 2,000 DKK is VAT.
VAT settlement
As a business, you are required to regularly settle VAT with the tax authorities. This involves reporting both the VAT you have charged to your customers (output VAT) and the VAT you have paid on your own purchases (input VAT). The difference between these two amounts is the sum you either have to pay to or receive from the tax authorities.
Example of VAT settlement
Suppose your webshop has collected 50,000 DKK in VAT from customers during a given period and has paid 30,000 DKK in VAT on purchases.
The total VAT settlement is calculated as:
VAT settlement = Output VAT - Input VAT
In this case:
VAT settlement = 50,000 DKK - 30,000 DKK = 20,000 DKK
You will therefore need to pay 20,000 DKK in VAT to the tax authorities for this period.
Conclusion
VAT is an essential part of the daily accounting operations for webshops and other businesses. It’s important to understand how to correctly calculate and settle VAT to ensure compliance with the law and avoid fines or other penalties. With a solid understanding of the VAT system, businesses can efficiently manage their VAT obligations and focus on growing their operations.
Learn all about VAT and how proper VAT registration and reporting can help your business comply with legislation and optimise your financial processes. Get to grips with the VAT rules for online stores