Home » Eng Accounting » V » Value added tax (V.A.T.)

Value added tax (V.A.T.)

Must be read in a historical context.

This tax, already applied in other European countries, was introduced to the United Kingdom in 1973. Although a novelty by name, its effect was not dissimilar, from the viewpoint of the ultimate consumer, to the purchase tax which it replaced. However, in so far as it does not have to be paid to the Customs and Excise until goods or services on which it is levied are exchanged for cash by the consumer, the retailer is theoretically in a better position than under purchase tax, which, being levied on the manufacturer, was automatically included in the value of goods bought by the retailer, whether sold or not. However, the amount of additional paperwork involved has virtually extinguished the advantages. The underlying principle of V. A.T. is that tax is levied at each stage of the production of goods or services and on the value added at each stage; e.g. tax is paid by manufacturers on the cost of making an item, by wholesalers on the price they charge the retailer and by retailers on the price they charge the consumer. Each party in this process must account to the Customs and Excise for the tax on their output but may deduct from this figure the amount of tax already paid by the party supplying them. If we look at it in reverse and take an article priced at £11 in a shop, then, assuming a V. A.T. rate of 10 per cent, the tax is £1, i.e. one eleventh of the total price. Although the Customs and Excise are entitled to £1 they will receive it in stages determined by the number of hands through which the article passes on its way to the consumer’s pocket. Part will be paid by the manufacturer, part by the wholesaler and part by the retailer, and all these portions will be handed over at different times. Apart from the paperwork involved, additional problems are posed by differing rates of tax and distinctions between taxable and non-taxable goods and services.

Manufacturers and distributors must keep adequate records to show how the various V.A.T. regulations have been applied and must produce such records on demand. They must also complete a quarterly return showing tax due and how the amount is calculated. Needless to say, the tax is not popular but was part of the >rice paid for entry into the common market. There are V.A.T. centres in most cities and many explanatory books and pamphlets available on inquiry. Businesses with a small turnover may apply for total exemption from V.A.T.

Reference: The Penguin Business Dictionary, 3rd edt.