VAT

[Old McDonald]

In dealing with an enquiry about costs of purchase for the smallholding I am selling in Portugal, I decided that the treatment of businesses in VAT matters has to be the most stupid of stupid taxes. For those too young to remember, setting up VAT in the UK was a compulsory part of us joining the then EC. Do not expect it to be removed after Brexit. Income tax was originally supposed to be only a temporary measure.

In the past two weeks I have done business with others in the UK, Ireland, Spain and Portugal. In the case of the first three countries the EU rules are that business to business transactions, called intra community trade, are zero rated. A legitimate business expense would normally allow VAT to be reclaimed, but since there are no means of reclaiming VAT from a “foreign” country, it is zero rated.

Now we come to dealings within a business’ home country. The seller charges VAT to the purchaser. The seller pays it to the government. The purchaser reclaims it from the government. The government pays the seller. The seller then has his money back.

Have you ever heard of such an absolute total waste of so many peoples’ time? Think of the efficiency savings which would be made by every single VAT registered business throughout the UK if the present intra community rules applied to UK businesses after Brexit.

It would seem the time is right for all UK businesses to lobby for this to be applied. Who will start the ball rolling? CBI, NFUs, Trade Unions, a big company - or some peasant trying to reduce his paperwork?

At least think about how much time you would save.

 

[betweenthelines]

I think the theory is that the Govt keeps the tax on the difference between the price you bought things at and the price you sell them for -hence VALUE ADDED Tax.

Say you buy nuts, bolts and bits of metal for £100 and make a Gizmo machine with the nuts bolts and metal, then sell the Gizmo machine for £500-treasury benefits by the VAT on the £400 value you have added to the nuts, bolts etc.

I understood that the original plan was that VAT raised an amount equal to the net cost of being in the Common Market-and that Brussels could direct individual Country's on VAT Rate and what was VATable.

Wasn't Income Tax introduced to pay for the Napoleonic wars? Perhaps it would have been cheaper to loose the war.

 

[Goweresque]

Now we come to dealings within a business’ home country. The seller charges VAT to the purchaser. The seller pays it to the government. The purchaser reclaims it from the government. The government pays the seller. The seller then has his money back.

I assume the bold bit should read 'purchaser'? Purchasers claim VAT back, not sellers.

As said above VAT is a tax on Value Added. Hence a two person chain doesn't show what it does. You need a three person chain to do that - Person A sells raw materials to Person B for £100+vat. No net VAT is paid, as you say, a circle - B pays A, A pays govt, govt pays B. But person B is in business (he can't claim the VAT back if he isn't), so uses the raw materials to make a product which he sells to Person C for £200+vat. At the end of the accounting period he has paid out £20 of VAT (on his inputs) and received £40 (on his outputs). His net position is he owes HMRC £20, which also happens to be the tax on the Value Added - £100 difference between raw material and finished product.

This chain may end at Person C who is a domestic consumer and can't claim the VAT back, or continue for any number of businesses until an end consumer is reached.

I actually think VAT is a relatively well designed tax, if you have to have a sales tax. If you want the end consumer to pay a purchase tax, somehow you have to design a system that taxes them while not imposing too much on the supply chain above the consumer. If you just say 'Retailers must charge sales tax, but B2B transactions are exempt', then it becomes a very difficult for any business seller to know if a person really is a business or not, and to differentiate between them. Take a petrol station - I can reclaim VAT on the fuel I buy for my trade, but Bill Smith going to work in a factory can't. How is the petrol station to know I should not be charged sales tax, but Bill should? If on the other hand you say that all sales regardless of whether B2B or B2C must include sales tax, and then businesses can claim back the sales tax on inputs, well thats pretty much VAT.............

 

[Old McDonald]

You are correct in so far as the VA part is concerned, but the Treasury receives the VAT charged by a manufacturer to a final consumer on the £500 goods sold. My suggestion is that the VAT on the £100 purchase woud not have been charged and reclaimed. It is a reduction in work for the two businesses.

Many of us, farmers in particular, do not actually add value to our purchases, we use them ourselves, farmers normally producing zero rated foodstuffs, although not always. Consequently the Treasury receives nothing from our sales, yet we have still had to pay and reclaim. If we sell positively rated goods (or our zero rated ones are turned into a positively rated one) then the Treasury again still receives tax on the full value of the sale to a final consumer.

As for your third paragraph, I do not know what calculations were made to determine the orginal rates of VAT in the UK and how much the Treasury decided it wanted to collect. The only compulsory part of it was that every EC member state had to have a VAT regime in place. Brussels does not control the VAT rates charged in EU member states, each country sets it own. For example there was no VAT on basic foods and children's clothing in the UK, but they are chargeable items in other countries. Rates on all items are dfferent in all countries where I have done business.

You are right about IT in its present form being for the Napoleonic wars, but I doubt whether many would agree with you that we would have been better to let the French win.

 

[Old McDonald]

I assume the bold bit should read 'purchaser'? Purchasers claim VAT back, not sellers.

Correct, and my apologies.

I was about to sign off as I have outside work to do before dark, but saw you had posted as I was typing mine. I will read the rest of your post later tonight.

 

[Goweresque]

Many of us, farmers in particular, do not actually add value to our purchases, we use them ourselves, farmers normally producing zero rated foodstuffs, although not always. Consequently the Treasury receives nothing from our sales, yet we have still had to pay and reclaim. If we sell positively rated goods (or our zero rated ones are turned into a positively rated one) then the Treasury again still receives tax on the full value of the sale to a final consumer.

Farming is indeed in an anomalous position, being able to buy items with full VAT then sell items with zero VAT, and thus get a cheque back from the govt every quarter. Its just what happens when you set a VAT rate at less than the standard one for political reasons - I assume that the energy and water companies are in a similar position, with their sales to domestic properties taxed at 5% (or zero for water), but all their inputs charged at full rate.

Whereas a friend of mine is on the reverse of that - she runs a restaurant, so most of her inputs are zero rated (being food), but she has to charge full rate on her meals as the law decrees she's not providing food, rather a service, and thus is taxable at the full rate. She ends up paying a large VAT bill every quarter.

 

[7610 super q]

Ah, the EU again. Say no more. Say no more.

 

[digger64]

Farming is indeed in an anomalous position, being able to buy items with full VAT then sell items with zero VAT, and thus get a cheque back from the govt every quarter. Its just what happens when you set a VAT rate at less than the standard one for political reasons - I assume that the energy and water companies are in a similar position, with their sales to domestic properties taxed at 5% (or zero for water), but all their inputs charged at full rate.

Whereas a friend of mine is on the reverse of that - she runs a restaurant, so most of her inputs are zero rated (being food), but she has to charge full rate on her meals as the law decrees she's not providing food, rather a service, and thus is taxable at the full rate. She ends up paying a large VAT bill every quarter.

It does give her cashflow and working capital though

 

[Andbarbred]

Yes, she has interest free finance on tap there,where as farmer Bill has to find the outlay, possibly incurring interest.

 

[Old McDonald]

I apologise to anyone who was confused by my error of posting seller instead of purchaser in the OP. I do know that I should have said purchaser (in my earlier days I had VAT as part of my responsibility – and on a rather large scale of over £1million a week turnover) but for some reason I typed the wrong word twice. N.B. Would you believe it? I typed seller again immediately before the ( ) and had to amend it on re-reading before posting.

s said above VAT is a tax on Value Added. Hence a two person chain doesn't show what it does. You need a three person chain to do that - Person A sells raw materials to Person B for £100+vat. No net VAT is paid, as you say, a circle - B pays A, A pays govt, govt pays B. But person B is in business (he can't claim the VAT back if he isn't), so uses the raw materials to make a product which he sells to Person C for £200+vat. At the end of the accounting period he has paid out £20 of VAT (on his inputs) and received £40 (on his outputs). His net position is he owes HMRC £20, which also happens to be the tax on the Value Added - £100 difference between raw material and finished product.

This chain may end at Person C who is a domestic consumer and can't claim the VAT back, or continue for any number of businesses until an end consumer is reached.

I actually think VAT is a relatively well designed tax, if you have to have a sales tax. If you want the end consumer to pay a purchase tax, somehow you have to design a system that taxes them while not imposing too much on the supply chain above the consumer. If you just say 'Retailers must charge sales tax, but B2B transactions are exempt', then it becomes a very difficult for any business seller to know if a person really is a business or not, and to differentiate between them. Take a petrol station - I can reclaim VAT on the fuel I buy for my trade, but Bill Smith going to work in a factory can't. How is the petrol station to know I should not be charged sales tax, but Bill should? If on the other hand you say that all sales regardless of whether B2B or B2C must include sales tax, and then businesses can claim back the sales tax on inputs, well thats pretty much VAT..........

As usual your explanation of how things work is very well put and perhaps has educated some members who do not do their own returns.

Taking your first three person example. If there was zero rating/exemption between A and B both of them avoid the work involved in receiving or paying out and then A passing to the government and B reclaiming. B gains also from not having to lend the Treasury the VAT amount between paying A until he receives his reclaim. This helps him with cash flow. C pays VAT on his £200 purchase as usual and cannot reclaim. I will not complicate the thread with changes in rates so that the Treasury receives the same amount under my suggested simplification.

There is no problem whatsoever about businesses not charging other businesses. It happens all the time in cross border trade throughout the EU, undoubtedly millions of times every single day. As I said in my opening post, within just the last two weeks my miniscule operation has done business in four EU countries and had zero rating in three. It is a normal transaction for anybody who does business with other nations.

Bill Smith has to be charged VAT unless he can produce a VAT registration number. A small plastic card contains my number, which as I said in another thread is my VAT, NI and tax file number. I produce this card (or advise the number to a business in another member state) whenever I need a VAT invoice. Doing business with a new supplier invariably results in a slight delay whilst they verify that the number given is a valid one, and mine. Common practice throughout the EU, and it is a requirement in most countries that the VAT registration number of the purchaser is shown on the invoice. That way invoices cannot be passed over to a business by a final consumer. From memory this safeguard is not used in the UK.

I am not advocating what you suggest in your final sentence, but the simplification within the UK of what already happens throughout the EU for intra community trade.

Farming is indeed in an anomalous position, being able to buy items with full VAT then sell items with zero VAT, and thus get a cheque back from the govt every quarter. Its just what happens when you set a VAT rate at less than the standard one for political reasons - I assume that the energy and water companies are in a similar position, with their sales to domestic properties taxed at 5% (or zero for water), but all their inputs charged at full rate.

Whereas a friend of mine is on the reverse of that - she runs a restaurant, so most of her inputs are zero rated (being food), but she has to charge full rate on her meals as the law decrees she's not providing food, rather a service, and thus is taxable at the full rate. She ends up paying a large VAT bill every quarter.

It matters not what the VAT rate is. A valid business expense is reclaimable at all rates.

Your friend may well have a large VAT bill every quarter, but, and this is the crux of the matter, she is not paying the tax, the consumer is. She already has the money from the final consumer to pass to the government. Your friend is an unpaid tax collector - although also being able to use the VAt received until havindg to pay it to the govt. She would continue to be a tax collector under my proposal. The difference is she would not have to pay out to her suppliers and then reclaim what she has paid out.

Consider this scenario. Two businesses next door to each other and close to a border. I am not very far from Spain, and buy a few things from there. If I do not sell my place in the next couple of years I will also be selling there. You could think of the two businesses as being either one or the other side of the NI/Irish border. Both businesses have exactly the same amount of sales of goods at the same rates of VAT. The difference between them is that one buys absolutely everything they need within their own country. The other buys absolutely everything they need over the border. The first pays out VAT and reclaims it as a legitimate business cost. The second does not have to find the cash for VAT until reclaimed because its supplies are zero rated. The second also does not have the work involved in reclaiming the VAT it has paid out. Both pay the same amount to their government in VAT charged to the final consumer.

I well accept that the term VAT would become a misnomer and perhaps it should in future be referred to as a Sales Tax, but that is no problem whatsoever to the government. No other change is needed beyond making transactions between UK businesses zero rated as they are now for intra community trade.

 

[colhonk]

But look at all the Civil Servants needed to deal with all the paperwork involved,keeps the dole figure down.

 

[stewart]

Once more the EU gets the blame, roll on March 2019 with no Europe to lay the blame on.

VAT is not just used in the EU it is collected worldwide in many different guises, GST sales and purchase tax etc etc.

It is very efficient and cost effective way of collecting tax revenue, it is not as complicated as you portray it, don't see it as a problem and the ideal would be for a high rate of VAT and lower the income tax rate. User pays.

 

[Tarw Coch]

Whereas a friend of mine is on the reverse of that - she runs a restaurant, so most of her inputs are zero rated (being food), but she has to charge full rate on her meals as the law decrees she's not providing food, rather a service, and thus is taxable at the full rate. She ends up paying a large VAT bill every quarter.

I seem to remember as a youngster that there was no VAT on takeaways but that there was if you ate in, as such chippys would ask you if you were eating in or taking away and the price charged varied accordingly.

 

[TheTallGuy]

Once more the EU gets the blame, roll on March 2019 with no Europe to lay the blame on.

VAT is not just used in the EU it is collected worldwide in many different guises, GST sales and purchase tax etc etc.

It is very efficient and cost effective way of collecting tax revenue, it is not as complicated as you portray it, don't see it as a problem and the ideal would be for a high rate of VAT and lower the income tax rate. User pays.

Pre EEC/EU we had the power to choose how to tax purchases and what products attracted taxation. A classic case of where EU diktat has gone too far is that womens sanitary products are considered to be a non essential item & hence attract taxation, but items such as razors, cake & non chocolate covered biccies are considered essential and hence don't attract VAT. Brussels has refused to allow the rule to changed - some countries (UK included) have put sanitary products into the reduced rate group which is a far as EU law allows, I believe that the only exemption is in Ireland where they were already zero rated pre joining the EU.

 

[Still Farming]

I seem to remember as a youngster that there was no VAT on takeaways but that there was if you ate in, as such chippys would ask you if you were eating in or taking away and the price charged varied accordingly.

If registered or not if under thresholds applicable.

 

[davidroberts30]

its way too easy to just give your VAT number to the business your dealing with and not charging/reclaiming it
but the GOV will miss out on any interest on monies passing through its hands and too many useless spunk trumpets will be out of jobs

 

[sawdust]

I seem to remember as a youngster that there was no VAT on takeaways but that there was if you ate in, as such chippys would ask you if you were eating in or taking away and the price charged varied accordingly.

Vat on takeaways, in Scotland, I've the receipts to prove it, chippy I was in, breaks down vat items on take away food, but if you sit in just comes with a total vat amount, as all the condiments are there to use freely, so he explained to me.

 

[Tarw Coch]

Vat on takeaways, in Scotland, I've the receipts to prove it, chippy I was in, breaks down vat items on take away food, but if you sit in just comes with a total vat amount, as all the condiments are there to use freely, so he explained to me.

Yes, there’s VAT on all takeaways now, it was when I was young that there was no VAT on takeaways, but there was if eating in.

 

[tommyurray]

In dealing with an enquiry about costs of purchase for the smallholding I am selling in Portugal, I decided that the treatment of businesses in VAT matters has to be the most stupid of stupid taxes. For those too young to remember, setting up VAT in the UK was a compulsory part of us joining the then EC. Do not expect it to be removed after Brexit. Income tax was originally supposed to be only a temporary measure.

In the past two weeks I have done business with others in the UK, Ireland, Spain and Portugal. In the case of the first three countries the EU rules are that business to business transactions, called intra community trade, are zero rated. A legitimate business expense would normally allow VAT to be reclaimed, but since there are no means of reclaiming VAT from a “foreign” country, it is zero rated.

Now we come to dealings within a business’ home country. The seller charges VAT to the purchaser. The seller pays it to the government. The purchaser reclaims it from the government. The government pays the seller. The seller then has his money back.

Have you ever heard of such an absolute total waste of so many peoples’ time? Think of the efficiency savings which would be made by every single VAT registered business throughout the UK if the present intra community rules applied to UK businesses after Brexit.

It would seem the time is right for all UK businesses to lobby for this to be applied. Who will start the ball rolling? CBI, NFUs, Trade Unions, a big company - or some peasant trying to reduce his paperwork?

At least think about how much time you would save.

After a vat reclaim the seller gets nothing from the government
Yes it is crazy that intra EU trade is vat free it is more Cashflow friendly to buy in the EU because stock in your hand costs 1/5 less than uk supplied stock but how else could you work vat or non vat free how would you prove that a sale was to a vat Reg business not a joe public with a computer and printer and Homebase’s or your mates vat number which would take me to the most interesting point who would the hmrc chase for o underpayment of vat don’t like the system but it works when they don’t mess with the vat rate

 

[TheTallGuy]

its way too easy to just give your VAT number to the business your dealing with and not charging/reclaiming it
but the GOV will miss out on any interest on monies passing through its hands and too many useless spunk trumpets will be out of jobs

Not sure that there is much interest being accrued as most business transactions are relatively balanced - don't forget that most VAT will be reclaimed by the purchaser in the same period in which the vendor does his return & "pays" his bill. The monthly system may skew that slightly, but only as a once off and then the system catches up.

Since the system is largely automated there wouldn't be many (if any) job losses - if anything more compliance checks would be needed to combat fraud. Under the current system only registered/validated businesses can reclaim & the returns system provides clear and simple legal responsibilites, with the business owner responsible for their claim. If you move to a non-charging system, how can the retailer/merchant validate that you have the right/authority to use a given VAT number?