VAT silly question

VAT silly question

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Silly question time:

If company A invoicing company B 1200 invoice which included £200 worth of VAT. Company B pays the invoice.

Company A pays £200 to HMRC

Company B claims £200 from HMRC

HMRC - net gain

What's the point of VAT for HMRC? Isn't this just admin process that makes no sense?

Thanks 

Replies (57)

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RLI
By lionofludesch
20th Feb 2015 17:44

Not at all

The point of VAT is that, at some point, somebody can't reclaim the VAT.

Last time I looked (a bit ago, to be fair)  VAT was the Government's second largest revenue stream.

A client once asked me why he had to charge VAT to people who could reclaim it.  I asked him if he wanted to verify whether all his customers were registered before he invoiced them.

He considered it for a nano-second and said "No, not really".

Yeah - it was a silly question.

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ghm
By TaxTeddy
20th Feb 2015 18:19

The Germans...

.... some time ago did propose a way round this. The point of VAT is that only the end user actually pays. From memory, their solution was that you wouldn't charge VAT to anyone who was VAT registered, only unregistered 'consumers'.

Obviously, the proposal was shouted down - clearly it would have cut down on a huge amount of paperwork and as this is an EU tax, it simply couldn't be allowed.

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Replying to ohgoodgodno:
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By mackthefork
20th Feb 2015 18:51

Or could it just possibly be......

.....that they thought about it and decided that the likely consequence of this would be that only VAT registered would ever buy anything from then onwards.

Regards

MtF

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Replying to SteveHa:
RLI
By lionofludesch
21st Feb 2015 09:11

Unlikely

mackthefork wrote:

.....that they thought about it and decided that the likely consequence of this would be that only VAT registered would ever buy anything from then onwards.

Regards

MtF

I don't get this comment.  I buy stuff.  Some of it has VAT on.  I buy it because I need it.  The VAT charge is irrelevant to that decision.

Are we saying that only black cab drivers buy cars ?

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Replying to SXGuy:
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By mackthefork
21st Feb 2015 17:11

What did I miss?

lionofludesch wrote:

mackthefork wrote:

.....that they thought about it and decided that the likely consequence of this would be that only VAT registered would ever buy anything from then onwards.

Regards

MtF

I don't get this comment.  I buy stuff.  Some of it has VAT on.  I buy it because I need it.  The VAT charge is irrelevant to that decision.

Are we saying that only black cab drivers buy cars ?

All I'm saying is that it is massively open to abuse, and I feel that although spending would be unaffected,the VAT take would disappear to nothing, as everyone would suddenly have a friend with a VAT number buy stuff 'for business purposes'.

Hopefully that makes more sense.

Regards

MtF

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Replying to Justin Bryant:
RLI
By lionofludesch
22nd Feb 2015 10:17

Exports

mackthefork wrote:

lionofludesch wrote:

mackthefork wrote:

.....that they thought about it and decided that the likely consequence of this would be that only VAT registered would ever buy anything from then onwards.

Regards

MtF

I don't get this comment.  I buy stuff.  Some of it has VAT on.  I buy it because I need it.  The VAT charge is irrelevant to that decision.

Are we saying that only black cab drivers buy cars ?

All I'm saying is that it is massively open to abuse, and I feel that although spending would be unaffected,the VAT take would disappear to nothing, as everyone would suddenly have a friend with a VAT number buy stuff 'for business purposes'.

Hopefully that makes more sense.

Regards

MtF

To some extent, I agree with you.  That notion was in my first post when I commented on the need to verify VAT numbers. Like we do with exports.

However, VAT fraud is possible now if you can get a VAT registered mate to buy stuff for you and claim the VAT back through his registration.  I don't see that the risk changes much.

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By janej60
20th Feb 2015 20:06

The way I see it - please tell me if I'm mistaken!

Charging VAT at the end point is the most financially benficial for a goverment, because this is the highest price of any product along the chain.  Say for example Company A makes some material, then sells it to Manufacturer B for cost price + profit, then B sells it to Retailer C for cost + profit, which then sell it to Customer D for cost + profit + VAT.  Charging VAT at any other point in the chain wouldn't be as lucrative.  By charging VAT right at the end, you're charging VAT on the original cost price of Company A making the material, plus on the profit of A, B, C and D toghether, in one sum.  Loads of £££.  Or $$$.

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Replying to mbee1:
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By janej60
21st Feb 2015 22:31

Indeed - good point.

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Replying to mbee1:
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By janej60
21st Feb 2015 22:32

Indeed - good point.

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By shaun king
20th Feb 2015 22:14

How else would you do it?

VAT is a tax on consumption by the final user and it provides a clear and visible audit trail. Furthermore, it is the cheapest tax for a tax authority to administer as all of the costly calculations and reporting etc are undertaken by business.

@jane60 the final step in your calculation is the only logic place to collect the tax and for those of us who remember Purchase Tax it is not a lot different in the way tax is collected - the final consumer!!

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Replying to paul.benny:
RLI
By lionofludesch
21st Feb 2015 08:30

Wholesale Price

shaun king wrote:

@jane60 the final step in your calculation is the only logic place to collect the tax and for those of us who remember Purchase Tax it is not a lot different in the way tax is collected - the final consumer!!

Actually, it was levied on the wholesale price.  Though - no doubt - the rates of tax charged reflected that.

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Replying to paul.benny:
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By cbp99
21st Feb 2015 10:15

.

shaun king wrote:

@jane60 the final step in your calculation is the only logic place to collect the tax and for those of us who remember Purchase Tax it is not a lot different in the way tax is collected - the final consumer!!

Just out of interest, as one who very vaguely remembers Purchase Tax, am I correct in thinking that this was only levied at the point of the final consumer, rather than throughout the supply chain as happens with Vat?

It seems to me that this would be cheaper to administer, and I have always wondered what advantage there is in the Vat system.

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Replying to frankfx:
RLI
By lionofludesch
21st Feb 2015 12:25

Services

cbp99 wrote:

Just out of interest, as one who very vaguely remembers Purchase Tax, am I correct in thinking that this was only levied at the point of the final consumer, rather than throughout the supply chain as happens with Vat?

It seems to me that this would be cheaper to administer, and I have always wondered what advantage there is in the Vat system.

Possibly the charge on services as well as goods ?

There was no purchase tax on accountants' fees, for example.

Purchase tax was indeed levied at one single point in the chain - but not the final sale to the consumer.

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By MDK45
21st Feb 2015 08:04

I was always told that as a tax it is one of the more administratively, cheaper taxes to impose. Lol, maybe 40 years ago...

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Replying to atleastisoundknowledgable...:
RLI
By lionofludesch
21st Feb 2015 08:39

Cheaper

MDK45 wrote:
I was always told that as a tax it is one of the more administratively, cheaper taxes to impose. Lol, maybe 40 years ago...

It is now.   For the Government.

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RLI
By lionofludesch
21st Feb 2015 08:28

Retailers Cash Flow

I don't think many retailers would thank you for the burden of paying the whole of the consumer's VAT liability, with no credit for input tax.

Ask the owner of any chip-oyl.  It's a huge responsibility to make sure the cash is there at the end of the quarter.

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By shaun king
21st Feb 2015 11:07

@cbp99 Purchase tax and Lionel

Yes purchase tax was only levied at the point of consumption but it was a condition of joining the EU or Common Market that we adopted VAT which was dreamt up by the Germans and French in the 1950's.

Lionel - re your idea that VAT is levied at the wholesale stage - how can you define wholesale and that can only apply to goods - services are not supplied wholesale. You have to revert back to the final stage which is consumption by the individual

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RLI
By lionofludesch
21st Feb 2015 12:16

Purchase Tax Rebate

I'm not suggesting that VAT should be levied on the wholesale price.  I said that purchase tax was levied on the wholesale price.

Wholesalers/manufacturers dealt with purchase tax, not retailers.  Retailers got a purchase tax rebate on stocks they had at 1 April 1973.  They claimed it in box 8 of their first VAT return. If purchase tax had been levied at the point of the final sale to the consumer, no tax would have been paid on stocks still held by the retailer and everybody's rebate would have been zero.

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RLI
By lionofludesch
21st Feb 2015 15:33

Wholesale

I'm mildly surprised that this was so easy to find ....

www.hansard.millbanksystems.com/commons/1965/may/17/clause-3-valuation-for-purchase-tax-of#S5CV0712P0_19650

References in paras 2 and 12 to the charge being based on wholesale price.

 

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By mackthefork
21st Feb 2015 17:16

I would also say

That cost is relevant to most buying decisions, for more or less everything except the basics, at least for the majority of people,I wish I didn't have to care.

Regards

MtF

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Replying to John Hextall:
RLI
By lionofludesch
22nd Feb 2015 10:05

Of course but .....

mackthefork wrote:

That cost is relevant to most buying decisions, for more or less everything except the basics, at least for the majority of people,I wish I didn't have to care.

Regards

MtF

Of course, but if I fancy a Homewheat with my cuppa, I don't buy a packet of Jaffa Cakes just because there's no VAT.

Every business decision involves deciding whether you're prepared to pay the price - what it's worth to you.

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Out of my mind
By runningmate
21st Feb 2015 17:58

Cash flow

Presumably there is a cashflow advantage to the government in charging VAT at every stage?

RM

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Replying to Sandnickel:
RLI
By lionofludesch
22nd Feb 2015 10:12

Decelerate

runningmate wrote:

Presumably there is a cashflow advantage to the government in charging VAT at every stage?

RM

Purchase tax was charged earlier in the process so VAT has actually decelerated the collection process.

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Replying to dejaneiro2005:
Out of my mind
By runningmate
22nd Feb 2015 11:30

What I was comparing

lionofludesch wrote:

runningmate wrote:

Presumably there is a cashflow advantage to the government in charging VAT at every stage?

RM

Purchase tax was charged earlier in the process so VAT has actually decelerated the collection process.

I was thinking about comparing the current VAT system with a new one whereby (somehow) VAT was only chargeable on sales to unregistered persons.  (Even so I think there may in fact be no cashflow advantage to government from the present system.)

RM

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RLI
By lionofludesch
22nd Feb 2015 11:19

Plus Ça Change......

One thing I came across whilst surfing the net was a 1959 article about the risks of sticking windows behind the driver's seat in a van.  It could mean that you paid Purchase Tax as a consequence.

It seemed awfully familiar somehow ..........

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RLI
By lionofludesch
22nd Feb 2015 11:46

Later

Indeed.

Purchase Tax was charged when the goods were made.

VAT - tax payable at each stage of the process.

A Sales Tax - which is effectively what you have in mind - would be payable on the final sale to the consumer. Maybe months later.

But I still think that the real barrier to that is the admin burden on the seller to verify whether the buyer is registered. Not to mention whether he is buying the goods or services for business or private use.

Not charging VAT between registered traders sounds a great idea - until you start to think about how that would actually work.  It's then that you realise that it's nonsense.

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By rc.falconer
25th Feb 2015 10:43

Sales tax

In the USA there is a sales tax which varies by state. I am not sure what it covers,but they manage to administer it.

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Replying to DJKL:
RLI
By lionofludesch
25th Feb 2015 11:22

Recovery

rc.falconer wrote:

In the USA there is a sales tax which varies by state. I am not sure what it covers,but they manage to administer it.

I don't think you can recover it as "input tax".

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By Tosie
25th Feb 2015 11:08

icaew

I remember the institute issuing a directive that we should not advise on vat as we were not qualified to do so. !!!!!!

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By Dave P
25th Feb 2015 12:13

..VAT silly question

What tends to be forgotten here within the VAT supply chain is the large amounts of monies that are available to the Government that are 'washing through' the VAT system. Some companies pay VAT, others reclaim VAT, however with the timing differences there are always huge amounts of money within the VAT system at any point in time available to the Government. No Chancellor is going to be willing to lose this...

 

 

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RLI
By lionofludesch
25th Feb 2015 13:25

Any System

To be fair, that would happen with any indirect tax system, would it not ?

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By raybackler
25th Feb 2015 15:22

EU VAT works on the principle that you have to charge VAT when selling to someone in another member state, unless provided with a VAT number.  If you want to be sure you can then verify the VAT number on the HMRC website.

All those selling to the end consumer would have to do is charge VAT unless presented with a VAT number, that then proves it is trade use.  There is no need to charge VAT at each stage of the VAT tree, as it nets out to zero apart from the final charge.

For example:

Company A sells items for £100 plus VAT of £20 to Company B and pays over £20 to the VATman.

Company B recovers £20 of VAT and then adds value to the item through the service or product provided.  It is sold for £250 plus VAT of £50 to Company C.  Company C pays over £30 to the VATman (£50 minus £20)

Company C recovers £50 of VAT then adds value to the item provided.  It is sold for £450 plus VAT of £90 to a member of the public.  Company C pays over £40 to the Vatman.

The VATman has received £90 (Company A £20, Company B £30 and Company C £40)

The only gain for the VATman is in cash flow, because Company A and Company B pay earlier on average than the £90 were it to be just charged by Company C to the member of the public.  Another factor is risk of not getting the money, which under the present system is spread across three companies, rather than one paying a much larger bill.

For most companies this simplification would make a large administration saving.  For those requiring VAT numbers for verification, it would cause an initial increase in workload, as no doubt ID would also play a part to prevent fraud.  This could be a bit like the way the CIS verification system works for sub contractors.

 

 

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RLI
By lionofludesch
25th Feb 2015 15:42

Less Admin ?

My first post revealed that my client didn't want to verify all his customers' VAT numbers.

Nor submit a quarterly return of all his sales invoices to registered customers.

It is naïve to think that applying the EU system to all sales will simply the admin process. That will very much depend on circumstances.

Not to mention that it lays the seller open to possible recovery proceedings.  Is he expected to check whether these goods are to be used for the customer's business ?

Suppose a furniture company sells a three piece suite to a company who says it's for his reception area.  If it actually ends up in the director's front room, who's responsible here ? Is the furniture company to obtain a declaration that this is a business to business sale ?  More paperwork ?

Compare that with what we have now.  Input tax incorrectly claimed.  Clearly the customer's responsibility.

Change to a "simpler system" ?  No, thank you. 

 

I like your assertion that "the CIS system works", by the way.  It's probably the worst administered part of the UK tax system.

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By pauljohnston
26th Feb 2015 08:30

The cinic in me says

that if it was only charged to the non-registered person the number of VAT people required at HMRC would reduce considerable and the govt would not want to be seeing to make lots of people redundant.

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RLI
By lionofludesch
26th Feb 2015 09:13

But ...

But it didn't bother them to reduce staff dealing with PAYE and SA.

This is an interesting thread but I'm disappointed by the standard of debate.  People don't seem to be putting much thought into it.

Let's think of it from the point of view of some middle-man, a wholesaler with all his suppliers and customers registered.  In theory he'd still need to be registered, but he'd submit a nil return every quarter. 

But how would he fill up his car ?  Would he go to the garage, tell the 16 year old behind the counter what his VAT number is so that he could pay net of VAT ?  The garage then has to separate that transaction out from those with Joe Public which do bear VAT so they have a new accounting problem.

How is all that a simplification ?

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By fozia
26th Feb 2015 10:59

Admin headache

VAT a definite conversation starter!

Whatever your thoughts are, the bottom line is the penultimate person in the chain is a small retailer and ends up with a system of do's and don't which is difficult to get you head around at the best of times and a real nuisance for accountants to explain it to the simple retailer (chippy!).  The VAT threshold is just too low and cafe's easily doing an £80k turnover, after rent, rates, wages etc may be netting a £20k profit for themselves and have had the
admin burden of being VAT registered as well as competing with unregistered
 traders in the very price sensitive end of the economy :(

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By shaun king
26th Feb 2015 11:13

VAT threshold

@fozia surely the VAT threshold is too high. Do what our friends in Europe do in the main - economic activity means VAT registration then everyone plays off a level playing field.

As to producing a VAT number to get goods VAT free takes me back to my days in HMC&E Investigation and a gang of Irish gents charging local authorities VAT on work they had undertaken. The VAT number they used was Trust House Forte which they got off a till slip at the old Scratchwood service station.

So a VAT number will mean nothing so that idea must be a non starter!!

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RLI
By lionofludesch
26th Feb 2015 11:18

Cliff Edge

I agree Shaun - the cliff edge is far too high.  Someone with little or no input tax needs to make an extra £16000 just to stand still if his customers cannot reclaim his VAT.

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Replying to charliecarne:
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By fozia
26th Feb 2015 11:32

My point exactly

The example I gave - that £20k net profit doesn't exist, the cash outflow of VAT wipe's clear anything the café owner made.

Shaun I understand about the all or nothing concept, but the penultimate person in that chain gets hardest hit and is also the most squeezed by the end user.  Everyone else in he middle see it come in and out of the accounts.  The retailer only see's it going out!

 

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By shaun king
26th Feb 2015 12:29

@fozia

Retailers see it come in and out but if every retailer is registered then VAT is not an issue in pricing as everyone charges it and accounts for it. all suppliers tend to purchase on a VAT exclusive cost basis so the VAT chargeable by the retailer is generally only on the mark up.

The oddity is where the liability changes because of the change in nature of the supply. Food purchased Zero rated but supply of catering standard rating!!

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RLI
By lionofludesch
26th Feb 2015 12:37

Agree with Shaun

The man who sells to the unregistered person is the one who loses out - usually that's the retailer - but, if the threshold wasn't so high, the cliff edge wouldn't be such a problem.

However, the culture that's been set by the high threshold is that unregistered "retailers" (and I use this in a loose sense) have used their VAT-exempt status to pass on savings to customers and gain an edge to win sales, rather than keep the extra money they would have had to pay over in VAT as a profit.

It'd be difficult to change that culture now. 

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By pauljohnston
27th Feb 2015 09:57

Some european thresholds

are greater than the Uk.  See Germany for instance.

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By shaun king
27th Feb 2015 11:01

what threshold greater than UK
@pauljohnson I think you will find Germany is effectively Zero

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Replying to Accountant A:
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By MattG
27th Feb 2015 15:02

Distance thresholds?

shaun king wrote:
@pauljohnson I think you will find Germany is effectively Zero

 

pauljohnson may have been looking at the distance selling thresholds, rather than the normal thresholds,easily done as if you Google "European VAT thresholds" the distance selling thresholds come up first!

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RLI
By lionofludesch
27th Feb 2015 14:09

Pretty Sure

I'm pretty sure I've read that we have the highest entry threshold.

Things change, obviously .....

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By shaun king
27th Feb 2015 14:35

we have

the highest threshold by a long way.

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By andy.partridge
27th Feb 2015 14:53

Well . . .

 . . . after 47 comments I think we can agree it wasn't a silly question, but it's not one I'll bring up at parties. 

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By shaun king
27th Feb 2015 15:17

He may well have

A worry for his clients though!!

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By Paul Soper
27th Feb 2015 15:19

Can't resist joining...

No one has pointed that VAT has a name - it is the Value Added tax, the amount you pay over is the tax on the value you have added at that stage in the production/consumption chain, whilst it is finally borne by the consumer or exempt business.  In France it is called TVA - Taxe sur la valeur ajoutée - which means the same, tax on the value added.  Germany has a registration threshold - €17,500 euros (current registration thresholds for all 28 countries can be seen here - http://www.vatlive.com/eu-vat-rules/vat-registration-threshold/) I think the confusion about a higher threshold was misinterpreting the Distance Selling threshold - either €35,000 or €100,000 depending on the country - as the registration threshold, Germany uses the higher €100,000 limit - but so do we.  What is more worrying, and not mentioned at all in this thread, is an OECD recommendation that all consumption should be taxed in the physical place of consumption rather than the place of origin.  South Africa has already adopted this rule (as did we in the EU on 1 January as part of the VATMESS MOSS) and Japan will follow later this year, other countries will then join in so that exporters will be faced with the nightmare of registering for some form of VAT or GST (general sales tax) in every country in the world - even the U$ is considering introducing this sort of system.  A nightmare for all businesses but catastrophic for small businesses who cannot conceivably comply with such a bureaucratic nightmare...

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Replying to Accountant A:
RLI
By lionofludesch
28th Feb 2015 08:36

Good point

Paulsoper wrote:

No one has pointed that VAT has a name - it is the Value Added tax, the amount you pay over is the tax on the value you have added at that stage in the production/consumption chain, whilst it is finally borne by the consumer or exempt business. 

A very good point.  The German name is Mehrwerk Steuer - literally more work tax.

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