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”
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>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.
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