I don’t get it. Does it have a different purpose in retail than it does business?
In business, if I sell you a service for £100 and have to add 20% VAT then that 20% gets paid to the government, though if I buy something for £120 (inc. VAT) I can reclaim that 20% back from the government anyway, so what was the point of money changing hands in the first place?
Is it not 1:1 transactions, on a large scale? I guess ideally people are selling more than they’re buying? Does the government end up in credit, and it’s a form of tax collection, the price of doing business? Then why make it that I can reclaim VAT back on purchases and not just keep the whole lot?
Asked my Book Keeper this who said it was a good question nobody’s ever asked before, and didn’t have an answer. “I’ve got the worst f**king lawyers”
In: 6
I suppose that Retail = the end product/service you pay VAT on.
Businesses don’t pay VAT on things they need to buy to make that end product/service, the VAT gets put on at the end for the final product/service.
Advocates of VATs claim that they raise government revenues without punishing the wealthy by charging them more through an income tax… Or something.
VAT is a consumption tax, which means that it’s intended use is to be levied only on the total economy, not the intervening steps.
You’re able to reclaim VAT because you run a business. This means that you also charge your customers VAT, and they’ll charge theirs, and so on, until you get to someone who has no customers (the end consumer). The full burden of VAT then falls on this consumer, and not the intermediate steps in the supply chain, even though it’s collected at each step.
Look at what you can claim back the VAT for. It’ll be things like office supplies and inventory, which are used to supply your products to your customers (Even if you’re not selling them your work computer, you’re still using the computer to sell to them, and the cost is included in the price you charge.) If you also buy, say, a bottle of rum for personal use, you won’t be able to claim back the VAT on that (if you do, that’s fraud), and so you pay all the VAT on that.
> In business, if I sell you a service for £100 and have to add 20% VAT then that 20% gets paid to the government, though if I buy something for £120 (inc. VAT) I can reclaim that 20% back from the government anyway, so what was the point of money changing hands in the first place?
It’s a bit more nuanced than that – the ultimate aim is for the VAT to be paid by the consumerretail end. So I buy raw materials at £10+VAT but make something out of it (or just sell it on to retail) at the higher price of £20+VAT. It is the last one that the government eventually gets, the previous steps (plus any other items purchased as part of that process) are all reclaimed.
Otherwise the raw itemservice would be taxed at every step and that would be cost prohibitive.
In short business to business transactions are VAT free, which is why you’re able to reclaim it. Business to consumer requires 20% VAT. Basically it’s the end customer that gets hit with the VAT not everybody in the supply chain.
The neat thing about VAT vs a sales tax on the end consumer is that the government doesn’t have to work out who the end consumer is. Because the tax is paid at every step of the process, but only not reclaimed by the final consumer, that final consumer is automatically found.
Also businesses do all the accounting themselves which makes it a very cheap tax to collect.
Value Add Tax.
Customer pays 20 extra on a 100 item: 20%
If you got the item at 60, then you added 40 of value.
You will collect 20, but you reclaim 12 from your purchase (you paid 60+12vat) . So, you paid just 8 total, which amounts to 20% of 40, the value you added to the product.
This way, each step pays vat more or less corresponding to their raw margins. Plus you.can use all steps in the supply chain to control each other.
>In business, if I sell you a service for £100 and have to add 20% VAT then that 20% gets paid to the government, though if I buy something for £120 (inc. VAT) I can reclaim that 20% back from the government anyway, so what was the point of money changing hands in the first place?
Ultimately, the goods or services end up being bought by someone who can’t claim the vat back. Doing it this way means there’s less work trying to work out who the end consumer is.
At each stage (each business that goods go through from raw material to end product) the value should increase (otherwise the company is making a loss). So the vat they receive on sales is usually higher than the vat they pay on materials.
Example.
Person 1 cuts down trees and sells them to person 2 for £100 (£120 including vat).
Person 1 has business costs of maybe £50 to produce that wood, so vat he pays is 20% of that, £10.
Person 1 receives £20 vat from person 2, pays £10 to HMRC, and the other £10 covers the vat he paid for tools.
Person 2 makes a trinket out of the wood and sells it to the end consumer in his trinket shop for £200 (£240 including vat).
He receives £40 vat from the consumer, keeps £20 to cover the vat he paid person 1, and pays HMRC £20.
So nobody in the chain of manufacturing is out of pocket, but HMRC has received £10 from person 1 and £20 from person 2 (they will also receive some from whoever person 1 bought tools from, but you get the idea). Ultimately HMRC get the vat and it’s paid by the end consumer, it just goes through many accountants books on the way.
One interesting aspect is that some things are sold without VAT — food, medical supplies, etc.
So if I run a company that makes cycles out of steel pipe, spoked wheels, and roller bearings, I pay some VAT to my supplier, and recover more VAT from my customer, and pay the difference to the VAT collector.
If you run a company that makes wheelchairs out of exactly the same components, then you pay the same VAT to your supplier, but your customer does not pay you any VAT because wheelchairs are exempt. So you get to reclaim the VAT you paid out for the parts, from the VAT system.
There are a lot of dark corners where people can cheat the system.
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