How VAT works
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VAT-Introduction
VAT is an abbreviation for Value added tax and this tax is paid whenever we purchase any goods or receive any services from any other person (Provided such other person might be any company, firm, or any legal person who is registered under VAT)
VAT is an Indirect tax in nature, where tax is paid indirectly to government. For example, unlike Income tax which we pay directly to tax authorities, VAT is collected by registered person from purchaser and then it is paid to authorities.
To understand better, let take an example, Mr A purchase certain goods (like television for instance) from XYZ shopping Mart for £1000 and charged with 20% of VAT i.e., £ 200. The total amount paid by Mr. A is £1200.
Now, £200 which is collected by XYZ shopping Mart will be paid to authorities by themself.
To charge VAT from the customer, the seller should be registered for VAT purpose. Once he get registered then such person will get VAT number from authorities and thereafter, such person can charge VAT from its customer.
For registered, the authorities set a threshold limit of taxable turnover of £85,000, i.e., if any person crosses this threshold, then such person should require himself getting registered under VAT. However, if you voluntarily like to get registered then you may get registered even if turnover is less than £85000.
What is the benefit of getting registered even at turnover less than £85000?
Upon you got registered, then you will able to reclaim the VAT paid at the time of any purchase as input VAT and can adjust such VAT paid with the outward VAT. For example:
XYZ Shopping Mart collected £200 from Mr. A, and suppose XYZ Shopping Mart purchased such TV at £9000 and paid VAT of 20% i.e., £180. Then the net VAT that XYZ Shopping Mart should pay is £20 (£200 minus £180)
What VAT is charged on
VAT is charged whenever there is a supply of goods or services and to charge VAT, supply should be made by VAT registered person. It means, if there is any sale made by any person for personal purpose, then such sale shall not be charged with VAT.
For Example, Mr. A sold his old car to Mr. B for £2000. Such sale shall not be charged with VAT as such sale made for personal purpose.
Following are the example where VAT shall be charged:
- goods and services (a service is anything other than supplying goods)
- hiring or loaning goods to someone
- selling business assets
- commission
- items sold to staff – for example canteen meals
- business goods used for personal reasons
- non-sales’ like bartering, part-exchange and gifts
These are known as ‘taxable supplies’. There are different rules for charities.
VAT is not charged on goods or services that are exempt from VAT or are unaffected by VAT (‘out of scope’).
How Much VAT should be charged?
Presently, VAT shall be charged at 3 different rates i.e., Standard VAT @20%, reduced VAT rate @5% and zero rated i.e., 0%
I hope you like our article on basic VAT and you might like to read our article on Scope on VAT
and also watch the video for more details- VAT Introduction
Taxation Insight
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