What is VAT?

Ok, so feel free to shoot me here. I wiki'ed it, I hear everyone use the "plus VAT" phrase... I am having a hard time wrapping my head around what VAT really is, What it is for, who gets it, and so on.

Anyone care to elaborate. I just didn't get enough from the various articles I found on it. I usually consider myself a rather intelligent person, however this concept is eluding me.... I know it stands for "value added tax", but what is that precisely?

VAT is a tax on all sales, this money goes to the government. In the UK, VAT is charged at a rate of 17.5%, so if you want to sell something and get £100 profit, then you need to sell it for £117.50 to allow for giving money to the government for VAT.

I blame the French.

Don't we all.

!*Bang*! :)

Actually the UK is quite lucky. Your business can earn a fair bit before you need to register for VAT. It depends on what your biz is too, if you have to buy in products or services then registering for VAT is an absolute necessity as you can buy without paying VAT. For something like writing small scale software or media, there is little outgoings so may not be worth it.
However it is a LOT of extra paperwork. Plus 17.5 isnt too bad, its just a little above average for EU.

Consider yourselves lucky, here in sweden its 25% vat and everyone has to be registered if supplying a product or service for money, even if its just a hobby!

I had a look at VAT rules when I decided to start selling (birthday) cards online. The threshold is something like £67,000 per year turnover before you have to start paying VAT. The treasury had a very helpful page about it, I'll see if I can find it again...

aha! they've bought a google ad for 'VAT rules' - http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/DG_4015895?cids=Google_PPC&cre=Money

[picky mode]
got your numbers a little wrong there :)

more like about £121.22
[/picky mode]

The best way to describe it (for a US centric person)

VAT is a sales tax, but instead of adding the tax to the retail price the tax is included in the retail price.

Not in the UK where VAT is 17.5%

VAT(value added tax)

It's a tax added to the sales price, and paid by the consumer.

It's not based on profit as claimed earlier, but on the sales price.

You buy an orange for $50
You decide to sell it for $100

Add VAT

Final salesprice:
Denmark $125(25 percent VAT)
Sweden $125(25 percent VAT)
UK $117.5(17.5 percet VAT)

It's a way for parasites to extract wealth from those who work for it.

yup basically thats it in a nutshell, its a way for everybody to keep politicians doing sod all every day and get paid for it.

Just to add to the confusion, sales VAT is 17.5%, whereas fuel VAT (gas and electricity) is 5%.

And yeah, if you're a UK business, VAT registration is voluntary until your turnover (not profit) reaches the threshold (£67,000 at the moment I think), OR if you trade outside of the European Union.

However, if you collect VAT, you must pay VAT. You can't collect VAT then use the fact that you're below the threshold as an excuse to not give it to the government.

The UK might charge less VAT than other European countries, but I'm damn sure they make up for that by fleecing us every which way; VAT, Fuel Tax, Road Tax, Council Tax, Tax on diesel and petrol, Insurance Premium Tax, Income Tax, National Insurance, Inheritance Tax, Savings Tax, Stamp Duties... it goes on. You can barely fart in this country without Gordon Brown trying to find lift your wallet.

My company is VAT registered which also means I can claim back the VAT on all computer purchases (very handy).

Also, if you start your business not VAT registered, then 3/4 of the way through the year you hit the VAT threshold, all VAT you owe will be calculated to the beginning of the year, even if you didnt charge VAT before hand.

So basically, you'll end up with a huge bill and Mr VAT man doesnt care two hoots whether you charge for it or not.

The VAT man, he's a shitbag!!! :)

Dabz

In other words, VAT is tax, we give a % of everything we buy to the government, so hopefully they may provide us with services and protect us from harm.

Just like a computer game. You build a marketplace to get more tax, because more people are buying stuff. You use this money to train soldiers and build more marketplaces. Raise taxes too high and your people rebel - that's where the soldiers you just bought come in :)

VAT = more Vodka And Tonic for Gordon Brown.

The best thing is when the vat man has to pay you, only happened twice with me but its a good feeling...

Heh, one thing nice about the UK is that most prices for everyday things include tax. You don't have to keep adding tax to the sticker price.

Here sales tax is 7.25% but local taxes are allowed to boost that to 8.75%. You have to add that to the sticker price of anything but food which like in most places is tax free.

How many foreign invasions has your government protected you from recently?

For the last ten years we've been invaded by illegal immigrants. Does this count?

Yeah, the U.S. isn't protecting us from that either :-(
In fact, I find myself paying them to merely screw me down the road (went through a divorce recently, and the state I live in is very conservative, so she screwed me pretty badly). In fact it's funny how little the laws actually mean in family court in the USA. Moral and Ethics, just as little there as well.


True, however I think Tax is more of a payment to them so they don't have the excuse to hold you at gun point at random will (think of the US mafia of the early 30's). Hell, so many laws are being passed now so that they can have any excuse to do as they want to with you...

Thanks for all the answers guys. I understand now. I do wish that tax (in general) was just required to be paid by the retailer rather than the consumer. I have always hated (since childhood) going to the store or saving up for something and then remembering that tax always adds another x.x%... If retailers had to pay tax (and more tax on luxury items) I'm sure big business would start to vote differently here in the US. Sure, they will make us pay it either way, but when they have to advertise those bloated prices (prices being different from state to state), they will start to take more notice at tax hindrances.

The worst thing about VAT is that businesses don't just add it to the cost of the item, but to any work done too.

If you take your car into a garage you are not only charged VAT on any items required, but it's included in the total cost of the item + labour. Now that is really $#!+

ummm.... 17.5% of £121.22 is about £21.22 (£21.2135) leaving £100.

Handy tip...

You can work out the VAT on anything in your head.

17.5% =

10% + half of that + half of that

So... for £30 vat would be

30/10=3
3/2 = 1.5
1.5/2 = .75

total = 5.25

easy see?

IPete2.

they list the price EXCLUDING tax?
god that would do my nut in if i ever went on my hols there

all uk products are listed inc vat, unless vat free like books (or they were) at one point some business would list the excluding VAT price so other businesses would have all info at hand when shopping around and filling out tax forms etc, i think maplins is the only shop ive ever gotten a vat entry in the reciept even though the products are listed as inc VAT

> they list the price EXCLUDING tax?


Yes, and in many places it is illegal to list it the other way (including the tax). It's not so hard to figure out though, usually it is less then 10% so by adding 10 cents per dollar you know you have the total cost covered.

Gasoline does not work that way though, the tax on it IS included in the price. I can't think of any other examples where the tax is included though. (oh yeah, best bet is to shop in Delaware - they have no sales tax there)

I've made the VAT very simple. I always pay 21% VAT no matter what. That way I don't get in trouble with the tax office (as I may pay too much), and my bookkeeping gets much more simple (which saves easily the money in not wasted time of thinking of complicated VAT formulas).

Businesses need only to buy and sell products, there is no other thing needed. Salaries and insurances are uselessly complicated, just treat your employees as products which produce products. So when you buy something for your company, you pay the real price (which includes VAT), and when you sell it, you sell it for the real price too (which also includes VAT).

Lets say you buy some raw material, like 3D engines, and you sell games which are produced with those 3D engines. Then you book the purchase (real price), and you book the sales (real price). For the tax office you just inform that you have bought and sold products, and if you sold for more than you bought, you just pay the taxes. Which is for example: 150€ purchase price = (150€ real price, 150€*21/100 = 31.5€ tax). Ok, so you got 31.5€ tax to spend on sales. Now you sell the game for 50€ times 100 (you sold 100 copies of it). So you have 50€*21/100 = 10.5€, so 10.5€ * 100 = 1050€ tax. You can now reduce the purchase tax from the sales tax, and you pay only 1050€-31.5€ to the tax office.

Of course its stupid to make more sales than purchases, so you should always grow your company revenue by investing in more products before you have to pay taxes. If you sell 100 games, and bought only 1 engine, you should buy all kinds of other essential tools for the company, like flash drives, usb sticks, higher bandwidth, leather chairs, ferraris, etc..., because all tax you pay to the government is lost money. Its better to have it invested in some real assets.

@Perturbatio
What andy_mc is trying to say is that if you want to sell an item for £100 to get that £100 you have to add 17.5% of that £100 to the price i.e. 17.5% of £100 is £17.50 so you sell it at £117.50.
Deducting the 17.5% that's added so that you know what you started with is a little more tricky.
Say £117.50 (we know that's £100 without the vat as 17.5% of £100 is £17.50) but we want to find out roughly what the starting prices is you would use something like 14.9%(works out as £17.5075) (Note I said roughly you could be out by penny. The closest I could get without a lot of messing around was 14.89362 (17.5000035) and who would remember that percentage)

???

Its dead easy. Take the amount inclusive of VAT, and divide by 1.175 to remove the VAT. Multiply by 1.175 to add VAT on.

(1.175 equates to 117.5%, or 100% + 17.5% VAT)

I knew someone would have an easier answer. God knows how my mate does his book keeping :)

If he's been giving you VAT advice, hopefully he uses an accountant. ;)

I use an acountant, he is well worth 45(-ish) quid (whatever 599:- is) a month!

I would be in jail by now otherwise.

Yeah you've basically made a classic VAT mistake there. To go from ex VAT to inc VAT you multiply the ex VAT price by 1.175. To go the other way you divide by 1.175. Oh I see that GfK has has said this already. I used to test people on this when I interviewed them (I ran a company that made accounting software for 9 years...)

Agreed that having an accountant saves money big time due to all the legal tricks and tactics they can teach you and also to make sure you do everything properly and don't get into trouble via ignorance.

Sounds much like our "GST" in Australia - 10% on almost everything ("goods and services tax") and is included in the final retail price.

and i thought 7% sales tax was bad.

er.. I still think my way is much easier for working it out in your head even:

17.5% = 10% + 5% + 2.5%

i.e.

10% + half of 10% + half of 5%

If you can find 10% of something the rest is well... its 3 answers added together

Find 10% (easy - move the decimal point)

divide your first answer by 2

divide your second answer by 2

add the 3 answers together - et voila.


IPete2.

Yeah that's how I do it in my head too.

5.1% here, so not too bad.


Yup, and to add insult to injury some retailers (for those who live in the states, you know who I am talking about) list the price minus their rebates as well. So you skim through ads in the paper and see "200 gig hard drive for $50" you say "whoa", drop the paper, grab your keys, and run to the store.

Get there to find out it was $200 but it comes with mail in rebates which usually require you to jump through 50 hoops to get (most likely making your time worth more than the rebate your applying for)...

I boycott those types of companies personally. If your going to tell me it's X.XX then don't require me to pay Y.YY (Z Times more than X) at the counter..... It's bad enough I have to tack on another 5.1% in my head, but to be expecting to pay like 10 bucks for something to get there and find out your still paying 10 bucks (down the road) but for now, your paying 200 is a complete waste of my time.

yeah circuit city is bad like that. i wish i lived in AK, no sales tax and they pay you $1000, to $2,000 a year from oil money. or i could move to montana no sales tax either.

The cure for Circuit City is Best Buy, at least here they got rid of the coupon mail in slop.

there are web pages that tell you this weeks deals and which ones are instant and which are mail in.

Here's the site I use since we have a store about 3 miles away. So far the rebates for other regions have all worked at my local store too which has been pretty cool.

http://www.frys-electronics-ads.com/

Ahhh, but they still have morons working for them (best buy).

It's like going to Menards, and a 16 year old tells you how to build a house......