VAT: A Simple Tax That’s Anything But Simple

Taxes are a part of life, whether we like it or not. One of the most known yet often overlooked taxes is Value-Added Tax (VAT). In Belgium, the standard VAT rate is 21%, embedded in the price of almost everything we buy. For consumers, VAT is straightforward—you pay it and move on. But for businesses, VAT is a complex system of charging, reclaiming, and navigating a maze of exceptions.

As a Product Manager, I often build business cases that require a clear understanding of what customers will ultimately pay, including their cost structure (cfr. my blog 'A good business plan is the foundation of every new idea' - https://bankloch.blogspot.com/2021/04/a-good-business-plan-is-foundation-of.html). While I’m not a tax specialist, I frequently need to understand VAT basics to make informed decisions.

At first glance, VAT seems straightforward: businesses charge VAT on sales and reclaim VAT on purchases, ensuring tax is paid only on the value added.
For example, if you sell an item for €100 that cost you €80, you’ll charge €21 in VAT (21% of €100) but reclaim €16.80 from your purchase costs, leaving a net VAT payment of €4.20 — essentially 21% of your profit margin.

In practice, however, businesses often can’t reclaim VAT on all expenses, making the actual tax burden higher than expected. Due to different rules, exceptions and hidden complexities the total tax rate is not that easy to calculate and thus requires quite some financial planning.

VAT is therefore not just a tax, but a strategic financial consideration that directly affects pricing, profitability, and cash flow. Whether structuring contracts, launching new products, or handling international transactions, businesses must account for VAT from the outset.

In B2B transactions, price negotiations typically exclude VAT, as businesses can often reclaim it. However, reality is rarely so simple. Consider these examples:

• Labor-intensive businesses: If most of your costs are salaries (which are VAT-exempt), you can’t reclaim much VAT—making VAT on revenue a real cost. This is a major challenge for consulting firms and similar businesses.

• Financial services: Banks and insurers can’t charge VAT on most of their services, but they also can’t reclaim VAT on operational costs, creating a hidden expense.

Beyond these basics, VAT regulations are filled with nuances that challenge both accounting teams and product managers:

• Multiple VAT rates: Not everything is taxed at 21%. For example:

  • Books and pharmaceuticals: 6%

  • Restaurant meals: 12% on food, 6% on drinks

  • Bike repairs: 6% for labor, 21% for spare parts

  • Home renovations: If the home is older than 10 years, companies charge only 6% VAT, even if they paid 21% on materials—leading to reclaiming more VAT than they collect.

• Non-recoverable VAT: Some expenses, such as company cars and fuel, come with only partial VAT deductions.

• Cross-border transactions: International sales involve deferred VAT, foreign tax reclaims, and compliance headaches.

• Gift cards and prepayments: If you sell a gift card for your store, no VAT is charged at the time of sale—VAT applies only when the card is redeemed. But what about resellers who buy gift cards at a discount and sell them at a markup? Should VAT apply to their margin?

• Real estate: Selling a new building may require a special VAT declaration (form 104.5) instead of standard VAT filings.

• Employee benefits: When employers lease bikes for employees, VAT is paid on the purchase—but since employees use the bikes personally, (partial) reclaiming VAT is unclear.

• Exempted professions and entities: Certain professions (like doctors, dentists, dietitians…​), small businesses (with less than €25,000 in revenue) and certain social, cultural, and educational organizations (e.g. schools, universities, retirement homes…​) are VAT-exempt, creating complexities for companies selling to them.

• Expense claims: Should contractor expenses be treated as reimbursements (no VAT) or included in service fees (with VAT)?

Due to these complexities, tax authorities frequently issue rulings and updates, making compliance an ongoing challenge. VAT errors can be costly as even small mistakes or delayed filings can result in significant fines.
Common pitfalls include:

• Invoice formatting: Incorrect VAT rates or missing mandatory details can lead to the loss of VAT recovery rights.

• VAT filings and deadlines: Businesses must submit quarterly (or monthly) VAT filings on time to avoid penalties.

• Advance VAT payments: While no longer required in Belgium, they are still recommended for financial planning and goodwill with tax authorities.

• Annual client listing: Companies must report all entities they’ve charged VAT to, allowing tax authorities to cross-check compliance.

Above all, one key piece of advice: Always specify whether prices are inclusive or exclusive of VAT in contracts. This small detail can prevent major disputes down the line.