VAT is a UK specific purchase levy. It stands for Valued Added Tax and is levied on the end consumer of a product or service.
Businesses which are registered for VAT charge the tax on the goods they sell and pay this amount over to the Customs and Revenue Service (HMRC).
In situations where the purchaser is also VAT registered, they are able to reclaim the amount which they have paid. This is usually carried out by deducting the amount they have been charged from the value which they themselves owe to HMRC.
How VAT is Levied
The following example will illustrate how VAT is charged, reclaimed and eventually levied on the end consumer.
- Seller A sold goods with a net value of £100 to company B and charged £20.00 VAT on the sale.
- Company B who is also VAT registered then add some features to the product and sells it for £200 net and adds £40.00 valued added tax to the sale.
- The product is bought by a private individual for their own personal use.
The resultant VAT calculations relating to these three parties based solely on the transactions described above are as follows:
Seller A who charged VAT of £20.00 would pay this amount over to Revenue and Customs.
Company B who incurred the Valued Added Tax of £20.00 would be able to deduct this amount from the £40.00 they charged to the private individual and thus would pay £20.00 to HMRC (£40.00 less £20.00).
The private individual who is not VAT registered pays the full £40.00 of tax and is not able to reclaim any of it. They are the final consumer of the product and thus bear all of the charge.
Revenue and Customs receive this £40.00 tax by way of a payment of £20.00 from Seller A and the same amount from Company B.
