Value Added Tax (VAT) is a consumption tax in Europe. It is similar to sales tax in the United States. VAT liability is when a business owes VAT to the government's taxation authority. A VAT-registered business collects VAT on behalf of the government and forwards those taxes to the government when they send in their VAT returns.
VAT liability isn't simply a matter of adding up all of the VAT collected and forwarding the total to the government. Unlike sales tax, VAT is levied at different points of production with goods and services. A business's total VAT liability is the amount of VAT collected, minus any VAT credits.
A business is entitled to deduct the VAT paid, or obtain a VAT credit, on any business items when calculating how much VAT liability it has. For example, if a business purchases and resells books, it can deduct the amount of VAT paid when purchasing those books from the wholesaler or distributor. In order to claim a VAT credit, a business must receive a VAT invoice for VAT paid.
VAT liability happens when services are rendered. For example, if you run a chauffeur service and are paid to escort someone from the airport to home, the VAT liability occurs when you drop the client at his house. If you are contracted to drive someone multiple times, the VAT liability occurs on each part of the service upon completion. An exception is when you are contracted to provide a service to someone and he makes payments on account, or regular payments as agreed. The VAT liability occurs when you get paid.
VAT liability occurs on real estate transactions on a cash basis. When a tenant pays a landlord the rent due, the VAT liability occurs on that date.
VAT liability on goods happens when goods or services are delivered to a customer. For example, if a person purchases an item of clothing from a store, the VAT liability occurs when the customer pays for and receives the item of clothing. In the case of partial goods delivery, VAT liability will occur when each part is delivered, not when the items are paid for. For example, if your business is paid in advance for a year for a monthly cleaning contract, the VAT liability each month will be 1/12th of the services rendered.