Financial Accounting for Business Management 4 - VAT Value Added Tax · An indirect tax levied on the sale of goods and services · In the UK, most businesses with a significant amount of turnover must be registered for VAT, paid to HMRC · Once registered, the business is issued with a VAT registration number, which is quoted on its source documents · VAT = 20% in UK currently · Certain items are zero-rated while others are at a reduced rate. . In addition to this, exempt supplies mean that the seller cannot claim back tax paid on those inputs · VAT is a cumulative tax, collected at various stages of a product's life · The tax ultimately ends up being paid in full (borne) by the final consumer of the good/service o If that final consumer is a VAT registered business, then it will be able to claim back the tax For example: 1. Initial supplier sells materials to Manufacturer for £60 a. 20% (£10) is paid to HMRC as VAT 2. Manufacturer adds on a margin to make it £160. 3. VAT of £32 (20%) is added onto this margin a. BUT £10 has already been paid. b. £32-£10=£22 c. £22 of VAT is paid to HMRC 4. Shop also adds margin. a. Again, £300 + VAT = £360 b. £360-£22 (already paid) = £28 5. Consumer buys good for £360 6. The amount of VAT the final consumer paid was the £60 added onto the shop price of £300 a. This is also the total amount of VAT paid to HMRC throughout the production of the product Manufacture and Sale of DVD Player VAT Collection by HMRC Keeps £50 SUPPLIER OFMATERIALS: Pays HMRC £10 £10 sells materials £50 VATcharged =£10 + Total received = £60 Keeps £160 Manufacturer £22 Pays HMRC £22 adds margin - sells for £160 VATcharged =£32 + Total Received = £192 V Keeps £300 Shop £28 Pays HMRC £28 adds margin - sells for £300 VAT charged = £60 Total Received = £360 + Consumer £O Pays nothing to HMRC Buys for £360 VAT paid £60 = ONLY paid for by consumer £60 This shows the final consumer pays the same amount of VAT equal to the amount paid throughout the production process
Input and Output Tax · Output Tax = VAT charged on goods and services SOLD by a business · Input Tax = VAT charged on goods/services PURCHASED by the business . If output tax > input tax, the business pays the difference to HMRC . If output tax < input tax, HMRC will refund the difference to the business. Accounting VAT · A business does not make any profit out of the output VAT it charges . Hence, the Income Statement figures should not include VAT · E.g. if a business sells goods for £600 + VAT of £120, i.e. the total price is £720, then the sales a/c should only record the £600 · The a/c entries are: o