What is Value Added Tax (VAT)?

Value Added Tax (VAT) is an indirect form of tax charged on the sale of goods and services. This tax is also known as "goods and services tax" or GST in some countries, including Australia, Canada, Singapore, New Zealand etc. An indirect tax is, when tax is collected from someone other than the person who actually bears the cost of the tax.

VAT was invented back in 1950s by Maurice Lauré, joint director of the French tax authority, the Direction générale des impôts, as taxe sur la valeur ajoutée (TVA in French).

Businesses are entitled to recover VAT on goods and services that they buy to make further supplies and services sold to end-users directly or indirectly, but personal end-consumers of goods and services cannot claim back VAT on purchases. Thus, the total tax imposed at each stage in the economic chain of supply is a constant fraction of the value added by a business to its goods and businesses has to borne the cost of collecting the tax rather by the state.

Implementation of VAT has resulted in discouraging tax fraud and tax evasion.

There are two types of VAT:
1. OUTPUT VAT is charged by a business and is paid by its customers. (in this case it is, VAT on its output supplies).

2. INPUT VAT is paid by a business to another businesses on the supplies that it receives (in this case it is, VAT on its input supplies).

Generally a business is able to recover its input VAT to the extent that the input VAT is attributable to its taxable outputs. Input VAT is claimed by setting it against the output VAT for which the business is required to account to the government, or, if there is an excess, by claiming a repayment from the government.

VAT is a tax on the final consumption of certain goods and services. Our Introduction to VAT guide provides a summary of the basic principles of VAT.

Introduction

Each year the Government sets a figure - should it be the same as the previous year or different - which if met by your company, you need to register for VAT.

If your business satisfies any of the following statements, you need to register for VAT:

• If your taxable turnover in the previous year exceeded £61,000*

• If your taxable turnover in the next 30 days is expected to exceed £61,000*

• The threshold to de-register (E.g.: If your turnover goes below VAT level) is £60,000*

* as from 1st April 2006

Furthermore, if you are currently trading - or plan to trade - with suppliers in EU countries, you are also required to register for VAT within 30 days.

The VAT Flat Rate Scheme

Do you have a 'taxable' turnover of less than £150,000? If so, your business may benefit from the VAT Flat Rate Scheme.

More Information

The following link will direct you to a document on the HM Customs & Excise web site (www.hmce.gov.uk) and will give you further detailed information on registering for VAT. Click here to open the HMCE VAT document (will open in a new window)