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How does VAT work?

Discussion in 'General Chat' started by GoldenShadow, Apr 28, 2011.


  1. GoldenShadow

    GoldenShadow PetForums VIP

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    Asking on here because I'd like it in layman terms as opposed to from a web page really.

    Sure VAT is whacked onto clothing/cosmetics and other such 'luxuries' but overall it ends up in the government's pocket, right? How does this happen, does a company pay the chunk of VAT directly to the government and when we buy the goods the VAT is included in the overall price that is given to the manufacturer/seller?

    Basically, I have a diagram like the one below. As you can see there is net taxes which are a withdrawal. My logic is that VAT wouldn't increase net taxes because its not charged on income like a tax is it, its charged on what we buy? So we will be paying more for what we buy, which in turn goes to the government via tax but through companies as opposed to individual people?

    [​IMG]
     
  2. osad3511

    osad3511 PetForums Newbie

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    If you have a calculator that has a % button (I'm pretty sure they all do) its easy to work out. If not take your price ex VAT and times it by 17.5 then divide it by 100.
     
  3. manic rose

    manic rose PetForums VIP

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    had a spell working in an accountants a few years ago and from the little I can remember every few months companies have to fill in a vat form. had to work out what percentage of their earnings was vat minus anything that was vat deductable, such as vat on products they had purchases, and they would then pay the balance to the government or claim some back if deductions were bigger than vat coming in. its only charged in goods and services and is either zero rated, 5% or 20% depending on the item. not sure if that helps at all!
     
  4. 912142

    912142 PetForums VIP

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    A company will pay VAT when they reach the threshold of I believe 75k - after which they will have to charge the consumer VAT on goods and services. Not everything has VAT added though - depends on the type of business. VAT does go to the government, however, companies can claim back VAT only if they are registered though.

    VAT is currently 20%.

    Does this answer your query?
     
  5. GoldenShadow

    GoldenShadow PetForums VIP

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    Sort of, still confused about how it applies to my diagram though! How do you think an increase in VAT would affect withdrawals and injections on my diagram?!

    Got to go dentist now but be back in a couple hours. It's doing my head in :(
     
  6. manic rose

    manic rose PetForums VIP

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    that diagram makes my head hurt! sorry cant be of more use :(
     
  7. Nithnell

    Nithnell PetForums Senior

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    Then to confuse you even further, don't forget the likes of myself can claim VAT back, so yes it goes to the govt, and then our accountant gets it back. I leave it to her to deal with so don't ask me how it works. :crazy:
     
  8. classixuk

    classixuk PetForums VIP

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    VAT works (in it's most simplest form) like this:

    As a business, I charge the consumer £20 for a haircut.

    The government advises me that I must charge 20% VAT on that service.

    Therefore, my price to you is £24.

    After 3 months, let's say I did 100 hair cuts (£2,400).

    The government requires me to fill in a VAT return and pay them the VAT element that I have collected for them (£4 x 100) £400.

    However, I will have bought supplies in order to do the haircuts, on which I also paid VAT. Let's imagine I bought £100 worth of stock, but paid £120 due to the VAT.

    Because I have already paid £20 VAT when I bought the stock, I deduct that from the £400 I have collected, and forward £380 to the government.

    They then add this to their coffers and use it to provide public services, benefits, health-care, paying off debts etc.

    So let's say they give my £380 to an out of work claimant.

    She comes in to my salon and pays me £24 for a haircut twice in 3 months. The government gets back £8 of that in VAT to re-invest, and so the circle continues.
     
  9. owieprone

    owieprone PetForums VIP

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    basically VAT is put on to every part of manufacturing of certain goods (some are exempt) there are 3 vat bands, standard (now 20%) reduced (5%) and zero rated
    standard is used on most things.
    reduced is used on household utilites, and zero for things the exchequer decides he likes.. like kids clothes and fruit or whatever.

    at each part of the manufacture process each company involved can claim back the VAT, the only people that generally can't is you and me at the end of the process where we buy the product or service provided.
    we basically pay VAT for the full manufacturing process.

    also those businesses which fall below the VAT threshold (70k) and are therefore not VAT registered, can still get the VAT back, but can't charge it to the end user as VAT, they must include it in the price of the product/service.
    so as per classix example, any business vat registered or not can claw back the Vat they are charged from the customer.

    so the change in VAT will affect companies but only until they can reclaim their vat. if they can't reclaim it in any of the above, or it affects their purchasing power too much they can of course get into difficulties obtaining stock and selling them at the correct price with the increase.

    there are several ways a company can pay VAT, yearly, qtrly, monthly or using a scheme they have devised with HMRC to pay tax in a way that doesn't affect their business, such as cash accounting, flat rate scheme or a specially devised individual scheme.

    any help? guess what i'm currently studying! lol
     
  10. GoldenShadow

    GoldenShadow PetForums VIP

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    Haha yes what you have all said does make some sense!

    But, is there any chance any of you can help me apply it to my diagram? As in what areas are going to be affected and why?

    I'm thinking there will be:

    (Withdrawals)
    Less Net Saving as if people are buying goods with a higher rate of VAT they will be paying more for them hence have less money to put in their savings accounts and the like?

    Net taxes will suffer no change as VAT isn't collected like income tax, its on what we buy?

    I have no idea on how Imports would be affected by a VAT increase?!

    (Injections)
    Investment = no idea, I'm trying to find out precisely what kind of investment they are on about, any ideas?

    Government Expenditure = the same amount they wouldn't spend less if they got any extra money..?

    Export Expenditure, again unsure on that one I'm totally unfamiliar with what the EU regulations are of late.

    Anyone have any ideas particularly on how VAT works on imports and exports? Google just doesn't give me nice answers :scared:

    Have emailed my lecturer about the general cycle but he can't help me in relation to the specifics...

    I should have chosen the other question :rolleyes:
     
  11. poohdog

    poohdog PetForums VIP

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    Incorrect...If you're not VAT registered you can't claim anything back...you pay VAT like the end user.Non VAT registered businesses can't charge their customers VAT...because they're not registered.
     
  12. owieprone

    owieprone PetForums VIP

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    withdrawals, seems correct in my understanding of it.

    net taxes again, correct as far as i can see.


    import are charged vat but exports aren't as the paperwork is in order (short list of things that are carhged shoud be available on the hmrc).

    there is no import/export now within the EU as we are a 'single entity', so VAT will be done like any other purchase.

    investments. would depend as you say on what it is being invested. as soem things are zero rated. if they mean bank investments or company investments then they would probably be affected quite considerably.
    property investment (part or whole) i think woudln't be affected in the same way or to the same extent as other investment ventures.

    the gov may be affect as they are a business like anything else, so they have to pay vat and claim it back (most depts anyway) so i'm not sure about that one.

    this might help?
    http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-rise-guidance.pdf
     
  13. owieprone

    owieprone PetForums VIP

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    no read it again,

    they can 'claim' it back by pricing the product/service to include the amount they paid for the product/service into the RRP. they don't put it on the price as a visible VAT component and hence don't claim it back from the HMRC. they 'claim' it from the customer by charging them the VAT as calculated for the individual item/service.
     
  14. poohdog

    poohdog PetForums VIP

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    It doesn't alter the fact that non registered traders can't claim it back...no matter how it's worded.
     
  15. owieprone

    owieprone PetForums VIP

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    well as that's not what i said in the first place, yep.
     
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