UK VAT system (BRIEF)
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INTRODUCTION TO VAT
VAT is a
type of indirect tax which is charged on most of the goods and services which we
buy and sell. It is charged from the buyer and paid to government by the
seller. The person who ultimately bears the burden is the final consumer. The amount of
VAT is decided by the state as percentage of the end-market price. Germany and
France were the first countries to implement it, but nowadays most of the
countries implemented this system.
Example for how a VAT system works
A raw material producer sells his material to a manufacturer for
$1.00 . Manufacturer uses the raw materials to produce goods and sell it the
retailer by keeping a profit margin of $0.20 at a selling price of $1.20. The retailer
charges the consumer ($1.50 x 1.10) = $1.65 and pays the government $0.15,
leaving the gross margin of $0.30.
As stated above the VAT system is implemented
in many countries, but this report is based on the VAT system of UNITED
KINGDOM.
UK VAT
SYSTEM
UK implemented the VAT system in 1973. It is administered and
collected by HM
Revenue and Customs,
primarily through the Value Added Tax Act 1994. It is the 3rd largest source of revenue for UK.
VAT is not only charged on domestically produced goods, but also on imported
goods. The standard rate of VAT is 20% since 4th January 2011. Some goods and services are subject to VAT at a reduced rate
of 5% (such as domestic fuel) or 0% (such as most food and children's
clothing).
There are 3 types of VAT rates currently in UK:
·
Standard
rate (20%)
·
Reduced
rates (5%)
·
Zero
rate (0%)
For further details,
Standard rate.
Most
goods and services are standard rate. Standard rate should be charged unless the goods or services are classed as
reduced or zero-rated.
This
includes:
·
any goods below the distance selling threshold you
supply to non-VAT registered EU customers - if you go over the threshold you’ll
have to register for VAT in that country.
·
most services you supply to an EU non-business customer - there
are different rules for business customers
Reduced rate.
This rate is
charged depending on, what the item is as well
as the circumstances of the sale. For example,
·
Children’s
car seats and domestic fuel or power are always charged at 5%
·
Mobility
aids for older people are only charged at 5% if they’re for someone over 60 and
the goods are installed in their home
Zero rate
Zero-rated means that the goods are still VAT-taxable but the rate of VAT that must charged from customers is 0%. The
retailers still have to record them in their VAT accounts and report them on their VAT Return. Examples include:
·
Books
and newspapers.
·
Children’s
clothes and shoes.
·
Motorcycle
helmets.
·
Most
goods exported to non-EU countries.
VAT Calculations.
VAT-inclusive
prices-
·
To
work out a price including the standard rate of VAT (20%), multiply the price
excluding VAT by 1.2.
VAT-exclusive
prices-
·
To work out a price excluding the
standard rate of VAT (20%) divide the price including VAT by 1.2.
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