VAT (Value Added Tax)
Please first have a look at this link which explains the concept in simple terms, just to start off:
http://blog.avalara.com/2013/05/29/wills-whiteboard-vat-explained/
VAT (in Dutch: BTW) is the tax levied on the value that a company has added to its products. This
addition of value arises when a company sells a product for a higher price then it paid when
purchasing this product. It is of course the customers of the company who decide whether they are
willing to pay for this added value, by either buying that product or not (customers always have to
pay the sales price including VAT).
When a company pays VAT to its supplier, it can reclaim this VAT from the government. This is called:
“VAT Receivable”.
When a company sells a product, it has to pass on the VAT over the selling price to the customer. The
company has to pay this VAT to the government. This is called: “VAT payable”.
Therefore, for any business VAT is not a cost (as an expense) but a transfer, whereby the business
temporarily acts as the Governments’ collection agent. The VAT paid to the suppliers becomes a
Receivable (from the Government) on the books. The VAT received from customers becomes a
Payable (to the Government) on the books.
Ultimately, it is the end consumer, the last one in the chain who buys the ultimate product, who
bears the cost of all the VAT.
Each section in the chain of Value Creation has charged VAT to the next element in the chain, but the
VAT payment to the government is only the difference between what is charged to the next element
in the chain and what has been paid already to the preceding element in the chain.
The following, simplified, example, illustrates this.
Iann, an early retired pensioner, discovered recently that a piece of land he inherited some time ago
from his grandfather contains a special sort of clay that is very suitable for making flowerpots. He
decides to start his own company. Every week, he excavates 200 kg of clay and sells it to Aylin, a
pottery shop, for €2.50 per kilo (exclusive of VAT). The applicable VAT rate is 21%. Iann incurs no
costs, because he did not pay for the clay. Therefore, no VAT is charged to him. The amount of VAT
that Iann charges his customer equals (200 kg x €2.50x21% = €105. The added value that Iann
realised equals ((200 x €2.50) - €0 =) €500.
Iann has to pay the VAT he charged his customers, to the government and can reclaim, from the
government, the VAT charged to him by his suppliers. The net amount of VAT that Iann pays to the
government equals ((200 x €2.50 x 21%) - €0 =) €105 and is exactly equal to 21% of the added value
of €500.
1
Please first have a look at this link which explains the concept in simple terms, just to start off:
http://blog.avalara.com/2013/05/29/wills-whiteboard-vat-explained/
VAT (in Dutch: BTW) is the tax levied on the value that a company has added to its products. This
addition of value arises when a company sells a product for a higher price then it paid when
purchasing this product. It is of course the customers of the company who decide whether they are
willing to pay for this added value, by either buying that product or not (customers always have to
pay the sales price including VAT).
When a company pays VAT to its supplier, it can reclaim this VAT from the government. This is called:
“VAT Receivable”.
When a company sells a product, it has to pass on the VAT over the selling price to the customer. The
company has to pay this VAT to the government. This is called: “VAT payable”.
Therefore, for any business VAT is not a cost (as an expense) but a transfer, whereby the business
temporarily acts as the Governments’ collection agent. The VAT paid to the suppliers becomes a
Receivable (from the Government) on the books. The VAT received from customers becomes a
Payable (to the Government) on the books.
Ultimately, it is the end consumer, the last one in the chain who buys the ultimate product, who
bears the cost of all the VAT.
Each section in the chain of Value Creation has charged VAT to the next element in the chain, but the
VAT payment to the government is only the difference between what is charged to the next element
in the chain and what has been paid already to the preceding element in the chain.
The following, simplified, example, illustrates this.
Iann, an early retired pensioner, discovered recently that a piece of land he inherited some time ago
from his grandfather contains a special sort of clay that is very suitable for making flowerpots. He
decides to start his own company. Every week, he excavates 200 kg of clay and sells it to Aylin, a
pottery shop, for €2.50 per kilo (exclusive of VAT). The applicable VAT rate is 21%. Iann incurs no
costs, because he did not pay for the clay. Therefore, no VAT is charged to him. The amount of VAT
that Iann charges his customer equals (200 kg x €2.50x21% = €105. The added value that Iann
realised equals ((200 x €2.50) - €0 =) €500.
Iann has to pay the VAT he charged his customers, to the government and can reclaim, from the
government, the VAT charged to him by his suppliers. The net amount of VAT that Iann pays to the
government equals ((200 x €2.50 x 21%) - €0 =) €105 and is exactly equal to 21% of the added value
of €500.
1
