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The tax charged which is levied on the added value that has resulted from an exchange is known as Value Added Tax (VAT). A VAT is an indirect tax collected by the seller rather than the person who actually bears the cost like consumer. It is different from sales tax because sales tax is charged on the total amount of exchange. Generally exports are not subjected to tax but in some cases if it is charged it is usually refunded back to avoid double taxation on final consumption.

For some people VAT is a large and scary subject. Many companies and businesses and their VAT liabilities far outweigh corporation tax liabilities. They do not know anything about its operation. Some of the key points are mentioned below that will help to understand VAT:

Scope of VAT:

Transactions on which tax are imposed are called VAT. Each and every transaction that is carried out in business is chargeable to VAT. It is neutral to the business supplier because this tax is charged by the consumer, but paid by the seller. This tax can be reclaimed if the business is registered.

Accounting for VAT:

If the business is registered to VAT than it needs to submit a VAT return. In this return you have to mention the amount of VAT that you charged from the customers. Against this only you can reclaim the amount you have been charged on your purchases. Adequate records should be maintained to back up these returns.

Input VAT:

For claiming back VAT tax on the purchases that are made by the business, the business has to be VAT registered. It is called Input VAT. Although there are some restriction like VAT cannot be claimed on any cost that do not relate to tax. For example VAT on business entertainment.

Partial Exemption:

Businesses which make exempt supplies cannot reclaim the VAT tax that is associated with the purchases. Some business which will have mixed supplies (exempt and taxable) may have some purchases that cannot be attributed in either type of supply. For this partial exemption method are used for VAT on this cost. A standard method that is used for exempt and taxable income is ratio but some other methods can also be used upon agreement with HM Custom & Excise.

VAT Visit:

There are some occasional visits by HM custom & excise to some companies. This is not that they believe that the company is deliberately avoiding paying VAT but instead they will have a closer look at the records.

Tags: value added tax, VAT, VAT rate



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