Value added tax is sometimes referred to as a consumption tax because it is charged to end consumers or recipients who buy the product or service. It is a type of indirect tax because it does not allow for the exact identification of the taxable person in advance. This can be illustrated by an example: an artist who is a VAT payer and who buys supplies in an art store, must pay VAT on the goods only if he buys the supplies for his own personal need rather than to produce art in order to sell it. This is because governments do not charge VAT on goods and services bought in the course of business. It would be very administratively taxing and inexpedient to have each end consumer asses the tax, which is why the Government does not collect the tax directly from the artist but rather from the seller. As a result, the bill shows the amount and the applicable VAT. The artist who buys the supplies therefore pays the amount plus the VAT, while the seller later pays the VAT to the tax authorities.
If an artist uses the art supplies for his own personal needs, he or she pays VAT as usual (and the VAT is assessed and settled by the seller). But if the artist buys the supplies in the course of his or her business, he or she may claim a refund on the VAT. In certain situations, goods may be bought without (net of) VAT, if the buyer can prove that he or she is a VAT payer.
The value added tax is based on two main principles:
- VAT is a tax on a personal consumption rather than on consumption in a professional or business context.
- VAT must be paid at each stage of production or distribution by all individuals or businesses. The VAT payers at the intermediary stages of production or distribution subsequently receive a refund on the VAT paid.
If a customer buys a photograph in the course of a business, such as for his store or a law firm, the purchase is classified as a business transaction and the buyer may therefore claim a VAT refund.
At the same time, an artist who is a VAT payer must add the value added tax to the selling price recorded in his invoice, must collect the VAT from his customer (such as a gallery owner) and pay the tax to the tax authorities. Professional artists (unlike amateurs) are therefore treated in the same manner as all business owners: they must calculate VAT for the goods sold, collect the VAT and pay the tax to tax authorities; at the same time, when buying supplies as part of their business, they pay VAT to the seller and then claim the tax refund in their VAT return filed with their local tax office.
At the moment, we have the following VAT rates in the Czech Republic:
- Standard rate 21 %,
- First reduced rate 15 %,
- Second reduced rate 10 %.
For details about VAT rates charged in other EU Member States, please click this link.