Hi, I really tried to understand the concepts of the above-mentioned terms but I find it hard to absorb and imagine how they work.
Can someone simplify vat, input tax and output tax? Thank you so much!
In: 5
Value-added tax is formally levied on each producer in the chain. Each producer in that chain pays VAT and the end consumer who buys the finished product doesn’t formally. Economically, however, the consumer pays for the cost of the VAT because producers
will try to pass any tax onto whoever buys their producer by the amount they can get away with.
You can contrast a VAT system to a system that primarily uses sales tax, in which most of the taxes on the product is levied on the final consumer and not on the businesses that contribute to the production of the good.
If you are a producer, value added is the price you sell the product for to the next producer (output) – the price you brought the product for from the previous producer (input). If that difference is positive and most of the time it will be because businesses add value to a product, a value-added tax will be levied on that value
added.
The input tax is the total VAT on the input when a producer buys and the output tax is the total VAT on the output when a producer sells. Each producer pays that difference for them to the government collector.
VAT is a tax on all goods and services made in the UK by a ‘taxable person’ in the course or furtherance of their business, unless it’s specifically exempt (mainly health and social care, education, finance and insurance).
Output tax VAT is charged on the sale of goods or services made by a business/taxable person.
Input tax VAT is the VAT a business pays on its purchases.
VAT is charged on the supply of goods and services. People who are carrying out business and who’s turnover exceeds a certain amount in a year must by law register for VAT. So businesses need to charge VAT on the goods they sell to customers, to give it to the government. This VAT they owe to the government is known as their ‘output VAT”. This is the VAT they have charged their customers on sales, their customers have actually paid it for them but they have to give it to the government. “Input VAT” is the VAT this said business can claim on the goods and services they have purchased. Businesses have to complete a “VAT Return”, which is basically the VAT they have charged on sales(output VAT) and the VAT they have been charged on purchases(Input VAT). If they have been charged more than they have charged then they will be due a VAT refund but if they have charged more than they have been charged then they owe X amount of VAT to the government. In short terms Input VAT is deducted from output VAT to calculate VAT liability. To help differentiate them, think OUTPUT, the VAT is going OUT from the businesses profits. For IN think the VAT is going INTO the business, they are being charged it. I hope this helps to clear it up!
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