VAT (Value Added Tax) is a consumption tax added to the price of goods and services. Unlike sales tax in the US, VAT is collected at each stage of production and distribution. For European freelancers, understanding VAT is essential for legal compliance and proper invoicing.
How VAT Works for Freelancers
When you charge clients, you typically add VAT to your invoice. You then pay that collected VAT to your government, while deducting VAT you paid on business expenses.
Example:
- Your service: €1,000
- VAT at 21%: €210
- Client pays: €1,210
- You keep: €1,000
- You remit to government: €210 (minus VAT you paid on expenses)
EU VAT Registration Thresholds
Most EU countries require VAT registration once you exceed a revenue threshold:
- Netherlands: €20,000
- Germany: €22,000
- France: €36,800
- Spain: €85,000
- UK: £90,000 (no longer EU, but similar system)
Below these thresholds, you can often operate as a small business without charging VAT.
Reverse Charge Mechanism
When invoicing business clients in other EU countries, the "reverse charge" mechanism applies. You don't charge VAT—the client accounts for it themselves.
Requirements:
- Client must be a business (not a consumer)
- Client must have a valid VAT number
- Your invoice must state "VAT reverse charged"
VAT on Digital Services
Special rules apply to digital services (software, consulting, online courses). You may need to charge the VAT rate of your client's country and register for VAT MOSS (Mini One Stop Shop) to simplify reporting.
Common VAT Mistakes
- Forgetting to verify client VAT numbers
- Charging wrong rates for international services
- Missing quarterly VAT return deadlines
- Not keeping proper documentation
Chronobill automatically handles VAT calculations based on your location and client details, ensuring your invoices comply with EU regulations and clearly show reverse charge when applicable.