The following instructions include a sample procedure to set up a 20% VAT in the U.K. for sales to retail customers. For other tax rates and countries, follow the general procedure but enter specific information that corresponds to your country, VAT rate, customer types, and so on.
Before proceeding, make sure to find out which rules and regulations apply to VAT in your area.
In certain business-to-business transactions, VAT is not assessed. Magento can validate a customer’s VAT ID to ensure that VAT is assessed (or not assessed) properly. See VAT ID Validation.
Step 1: Set Up Customer Tax Classes
On the Admin sidebar, click Stores.
Choose Tax Zones and Rates.
Ensure that there is a customer tax class that is appropriate to use with the VAT. For this example, ensure that there is a customer tax class named Retail Customer. If Retail Customer does not exist, click the Add New button and add it.
Step 2: Set Up Product Tax Classes
On the Admin menu, select Sales > Tax > Product Tax Classes.
Click the Add New button and create three new classes:
- VAT Standard
- VAT Reduced
- VAT Zero
Click the Save Class button for each new class that you add.
Step 3: Set Up Tax Zones and Rates
On the Admin menu, select Sales > Tax > Manage Tax Zones > Rates.
For this example you can remove the U.S. tax rates, or leave them as they are.
Click the Add New Tax Rate button. Add new rates as follows:
Tax Identifier: VAT Standard Country and State: United Kingdom Rate Percent: 20.00
Tax Identifier: VAT Reduced Country and State: United Kingdom Rate Percent: 5.00
Click Save Rate for each rate.
Step 4: Set Up Tax Rules
A tax rule is a combination of a customer tax class, a product tax class, and a tax rate.
On the Admin menu, select Sales > Tax > Manage Tax Rules.
Add new tax rules as follows:
Name: VAT Standard Customer Tax Class: Retail Customer Product Tax Class: VAT Standard Tax Rate: VAT Standard Rate
Name: VAT Reduced Customer Tax Class: Retail Customer Product Tax Class: VAT Reduced Tax Rate: VAT Reduced Rate
Click the Save Rule button for each rate.
Step 5: Apply Tax Classes to Products
On the Admin menu, select Catalog > Manage Products.
Open a product from your catalog in edit mode.
On the General page, find the Tax Class field. Then, select the VAT Class that applies to the product.
When complete, click the Save button.