Tuesday, November 03, 2009

Value Added Tax (VAT) - How does it really work?

Value Added Tax is applied to the difference in value between what the original supplier of a
good or service charges and what the ultimate customer of that good or services pays. Hence the name “Value Added”, a tax on the increase in value from one supplier to another and from the last supplier in a chain to the ultimate customer.
Value Added Tax is charged to the supplier of a good or service at the time the supplier issues
an invoice. The supplier is liable for the payment of the tax to the government. (The government where the supplier is registered). The buyer pays the supplier the amount charged on the invoice, including the VAT charged by the supplier.
The buyer MAY be able to reclaim the amount of VAT paid to a supplier from the government if:
– The buyer has a registered VAT number
– The supplied goods are directly related to VAT income / activities that the
customer conducts that are liable to VAT.
Here is a scenario of how vat works:

A) Supplier 1 charges $100.00 plus 20% VAT ($120.00) to Supplier 2.

B) Supplier 1 pays $20.00 VAT to the Government VAT tax office.

C) Supplier 2 charges $50.00 plus 20% VAT ( $180.00) to Customer.

D) Supplier 2 pays VAT $30.00 to Government and Claims Back VAT $20.00 paid to Supplier 1 (net payment of $10 = 20% on the $50.00 ‘value added’ by Supplier 2.

E) Customer pays $180.00 to Supplier 2 ($150.00 for product and $30.00 in VAT).

F) Customer* Claims Back from Government €30.00 in VAT paid to Supplier 2.

* Note: Customer can only claim VAT back from government if registered for VAT and eligible for a reclaim.

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