Value added tax

Chapter 19

VATWhen you buy goods / services you pay some money to the government. This is

called value added tax. The idea is that VAT is paid by the end user (the consumer) so

the business does not need to pay this. However, everyone in the supply chain

handles VAT. If a business receives more VAT than it has paid, then it must pay the

difference to the Government.

Sells £100 goods (included 10% VAT. £10 VAT)

Sells £500 goods (included 10% VAT. £50 VAT)

Therefore, £40 VAT must be paid to the Government.

VATIn the UK and most other countries, VAT is not noticed by consumers, as the price tag on goods includes the VAT. So psychologically, consumers believe the price they pay is the total price for the goods.

VAT in the UK is 20%, whereas in Thailand it is 7%. It varies from country to country, with some countries having no VAT at all, and other countries having a VAT rate up to 30%!

Not all goods and services are subject to VAT. Goods and services deemed necessary for people are not charged VAT, such as healthy food, newspapers and children’s clothing.

Business that do not need to pay VAT are called zero-rated businesses. They may have paid VAT when purchasing suppliers. The zero-rated business can claim this money back from the government (VAT refund)

Calculating VATAdding VAT to the basic cost of goods

Assuming that the VAT rate is 17.5% and the cost of goods sold is £50…

£50 X 17.5100

= £8.75

Therefore the total purchasing price for the consumer is £58.75

Calculating VATCalculating VAT when it has already been included in the price

Assuming that the VAT rate is 17.5% and the cost of goods sold is £50…

VAT (£) = VAT %100 + VAT %

X Gross amount

For example, the gross amount was £940 and the rate of VAT is 17.5%

VAT (£) = 17.5 %100 + 17.5%

X 940Therefore the VAT is £140. (the NET value of the goods is therefore £800)

Vat rate Gross price Net price Vat value10% £100 £90 £10

7 139.5 10.515 300 4520 235

2 734 6 532.98 34.023 953

10 134 120.6 8 222 17.76

17.5 82.5 17.512.5 98

5 56 53.2 9 199 17.91

11 678.18 83.8230 444

Vat rate Gross price Net price Vat value10% £100 £90 £10

7 150 139.5 10.515 300 255 4520 235 188 47

2 734 719.32 14.686 567 532.98 34.023 953 924.41 28.59

10 134 120.6 13.48 222 204.24 17.76

17.5 100 82.5 17.512.5 98 85.75 12.25

5 56 53.2 2.89 199 181.09 17.91

11 762 678.18 83.8230 444 310.8 133.2

Value added tax is the tax levied on sales by the government. Ultimately the tax is paid by the end consumer. The book-keeping entries for recording VAT are shown in a VAT account.