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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