Benjamin Franklin once famously said,” There are only two certainties in life. They are Death and Taxes”. Deep down inside our conscience we absolutely abhor the idea of paying a slice of our hard income to the government in the form of taxes but it is a necessary evil. The tax revenues generated by individual governments are used for the betterment of infrastructure and other public services in an ideal scenario.
Since we have approached the complicated world of taxes we might as well gain a fair understanding and perspective for a user point of view. In the gamut and multitude of taxes we mainly have two umbrellas which are Direct Taxes and Indirect Taxes. The direct taxes are directly deducted from your income by the government while the indirect taxes are levied on the goods and services that we consume as customers. We are going to expend most of sensibilities in understanding a small component of the Indirect Tax umbrella which is VAT (Value Added Tax).
To a layman like me, the VAT simply means a tax levied on the value that is added to a good or a service. Ironically, it sounds counter-productive but let’s proceed for the sake of argument. Let’s take a look at the simple theoretical mathematical formula that explains the definition:
- I pay a fee (VAT) while purchasing goods or services from my suppliers.
- I charge a fee (VAT) while selling goods or services to other business houses or individual customers.
Ideally Point (1) – Point (2) should be equal to 0. If that is not the case you either need to pay the Tax Authority an additional VAT amount or you can claim a refund depending on which side of the equation you are perched.
One must register their respective Business with the country specific Tax Authority in order to avail the services that they are entitled to. There are three main accounting methods to calculate VAT:
Cash Accounting: VAT is considered on a per invoice basis i.e. when a payment is received for a good or service or when a payment is made for a good or a service. Most small business employ this method as it is more effective in keeping track of their cash flows.
Accrual Accounting: The main difference of this method from Cash Accounting is that the VAT amount is considered when an invoice is raised and not when it is received. It takes the Receivable or Payable period into consideration.
Flat Rate Accounting: This method was deployed for simplification of VAT calculations. Under this method businesses are given the provision of paying a smaller percentage of the VAT amount they are ideally entitled to pay but under the condition that they will not make any VAT refund claims for the same.
This is a brief monologue of the VAT universe that we are involved in. I hope the article clarified a few questions bogging you’ll. Find out how you can use VAT returns services at Royds Accountancy.