Online VAT Calculator

How to calculate VAT?

VAT, or value added tax, might seem a bit overwhelming at first sight, however it is rather easy to calculate and take into account one familiar with it.

It is one of the taxes that it is generally present on our day to day lives and while it might seem small and unimportant, it actually has the power to shape and change the economy of an entire country at a macroeconomic level.

But what is VAT to begin with?

V.A.T, or Value Added Tax is a variable monetary value that is taxed by the national government as a set percentage value from any and all goods and services sold or contracted while on its territory. Basically a small % value of the sale value of an item of service is taxed whenever the item or service in question is contracted or sold.

Additionally, there are exemptions and write-offs that occur with VAT when it comes to business and commercial activity, either large or small scale, depending on the services rendered and/or products sold.

For example:

Let’s take for example a baker, who lives and works in the United Kingdom, where VAT is 20%.

He purchases ingredients worth 2000?, and pays 2400? for them with 400? being the VAT. The supplier then pays the 400? to the treasury as VAT.

He then uses the ingredients to bake a series of products that are worth 3200? in total, which means he will charge 3840? in total, 640? being the VAT alone.

This means that the baker will take the 640?, deduct the 400? that he has already paid when purchasing the ingredients and pay the remaining 240? to the national treasury.

The treasury itself receives both the VAT from the baker’s supplier (400?) and the VAT from the baker (240?), totaling 640? which is the total VAT for the finished products.

Each and every country in the world handles VAT differently, each and every country has its own VAT % values, each and every country has its own set of rules surrounding VAT but the basic principle and general idea is the same everywhere in the world.

So how do we calculate VAT?

You can go about this in a very simple and effective way. First off you need to find out what your country’s VAT value is.

In the United Kingdom it is 20%, which means it is one fifth of the value, because 100?20 = 5, so it can be represented as Value/5 which in turn serves as the basic formula for your calculations.

When purchasing goods or services, the formula is as follows:

(Total value of services + Total value of products)/5 = Total VAT
If you plan on providing products and services of your own, and will have to charge VAT to your customers in order to pay it to the treasury, then the formula is as follows:

(Total value of services provided + Total value of products sold)/5 = VAT paid by client
VAT paid by client - (VAT paid for materials + VAT paid for consumables) = VAT paid towards treasury

In conclusion

Regardless of whether you are a simple consumer, a supplier, a manufacturer or a service provider, knowing what VAT is and how to calculate it is paramount to understanding the economic environment that you, and your business, are in.

This was a simplified and basic way of calculating VAT and the general principle behind it, however some elements can vary slightly depending on what country you are in and the various legislatures surrounding it.

It is worth noting that VAT generally does not apply to imported goods purchased, or services that have been contracted outside the borders of your country.

For a more detailed list of rules and regulations surrounding VAT, it is highly recommended you consult your ministry of finance and your national treasury.

How VAT Affects Businesses

VAT (value added tax) can be defined as tax on consumable goods and services. Its percentage varies from one state to the other but has a 5% rate on GCC countries with this being the lowest worldwide. VAT is necessary for the economy as it is a form of revenue in the country and is levied on small, medium and large businesses.

This tax is levied on different stages of the supply chain i.e. from the manufacturer, to the wholesaler, retailer and finally the consumer. It is charged on the products as it moves along the supply chain adding value, hence the name “value added tax”.

There are some products however that are exempted from VAT, this may include, health care, education, some form of real estate transactions, as well as local transport. The exemption of goods and services from VAT differs from one country to the other.

Advantages of VAT

VAT is a form of revenue for the government and also a way of tracking businesses on tax payment. The government uses these funds to build their public sector mandates and to stabilize the economy and ensure its growth.

Impacts of VAT on businesses

It is important to note that VAT is considered as a cost and not an expense. The businesses only act as VAT collection agencies for the government as it is levied on the consumer when he/she purchases the end product. This however affects a few things in the business which are:-

Pricing – The end products price will have to include VAT before the consumer makes a purchase.
Profit margin – The profit margin will also be greatly affected depending on the VAT rate of the country. This means the price of a product will not only have the VAT levied on it but will also have the business’s profit included thereby making it ridiculously expensive.
Accounting – VAT will also affect the business accounting books where the business will be required to indicate the VAT levied on the product along with its total amount.
Cash flow – The businesses cash flow will also be greatly affected by the VAT levied on it, where the business will be required to clearly indicate the VAT rate needed to be collected as well as indicate a clear profit margin of the business.

How to become VAT compliant

Any registered business that sells goods and services that are not VAT exempted should have an automated VAT system embedded in their financial and accounting systems. It is important to find out which products are exempted from VAT before levying the tax on it.

Failure to compliancy may lead to penalties of up to five times the original VAT rate and it’s always safer to have an automated VAT calculator that deals with the deduction of this tax once every consumer makes a purchase. The VAT rates as well as penalties vary from one country to the other depending on the economy. VAT increases revenue for the government and aids in the enhancement of public sector services.

The Collection Process And Challenges Of The VAT

VAT is the widely known term in our everyday life. The abbreviated form of the VAT is Value Added Tax, which is basically the consumption tax related. This tax applies to a product at the certain stage of production and while the product is ready for retail sale. This tax comes into consideration for every size of business no matter if it is a startup or established. It is applicable to most goods and services offered and the percentage is determined for every country separately. It is important for making the growth of a country, but in some other way, it also affects businesses.

Collection process

Every company needs to make registration for VAT. Depending on the country rules, the registration criteria have some differences. The entities need to register for a some period of time, mostly for 12 months. After the VAT registration, there will be an additional amount of charge applied to all sales of the company. This additional amount is collected through the payment invoice. Every three months, the company has to pay their VAT to the state fiscal service. Until the VAT is paid, its amount should be deducted from income. The actual purpose of the VAT is a consumer tax and not a business tax.

Impact on business

Definitely, VAT is a good thing for a country as it acts as the “collection agent” on behalf of the government. But it has some direct impacts on businesses. VAT is not an expense for a business, it is a cost that passes through the customers at the time they purchase. It impacts indirect costs including pricing, cash flow, financial reporting, tax accounting, supply chain as well as compliance processes. For non-compliant, the cost is greater and also may incur penalties as well.

Challenges

The VAT rules stand as a challenge in front of the business organizations. The challenges will be like this:

It eventually needs some extra functions to perform, such as ensuring proper VAT calculation, collection, complying with laws, continuous update for systems, employees training etc.
Charging of business structure may create problems. For some business structures it can be a hassle as the different business entities need to handle one product or service.
Registering with VAT will legally need to prepare and keep the ranges of business records as the authorities might ask for annual accounts, general ledgers, purchase daybooks, issued and received invoices and credit and debit notes too. So the organizations have to keep records up to date for at least 5 years.
VAT also makes uncertainty for the business as well as to the customers,because it eventually increases the costs of products and services.

Though it seems stressful, still, VAT is necessary for the economic growth of the country, which makes the implementation even more straightforward and affordable. It also may help a business to grow efficiently in the long run. If a proper roadmap is followed, then VAT will also be helpful for a business run smooth.

Why VAT Is Necessary?

The value-added tax, or VAT for short, is an indirect consumption tax. It might sound simple, but things can be a bit more complicated. There are different reasons why such a tax system exists around the world. This article aims to explain what are they and why VAT is necessary for a healthy economy?

Why is VAT so important and what are the economic benefits?

It is a great source of government income. Many countries depend on VAT because it helps them fill in their treasuries. In some cases, it can generate as much as 40 percent of the government’s budget. All the money is essential for project spending, health care, building and maintaining infrastructure, and much more.

An important thing to point out is that the revenue from VAT is constant. The continuous stream of revenue will ensure that there will always be some government spending.

It can be a bit complicated at times, but it is a lot easier to manage and calculate VAT than any other methods of indirect taxation. One specific benefit is that companies that have a registration do not carry the burden of the tax. Since VAT broadens the tax base, the government can tax more industries. They even include services.

Of course, some people believe that VAT brings many negative effects. As an example, companies that have a VAT registration might be free from paying some other taxes, but their products’ prices will be much higher than usual. There will surely have negative marketing effects, because some clients will probably choose to buy products elsewhere.

Many people fear that such method of taxation is regressive and can seriously affect businesses as well as the poorer members of society. Also, VAT collection and implementation can be costly. Businesses will have to do careful calculations, since they will have to take into consideration every stage of production, what makes things more complicated. There will always be a risk of additional errors.

Which countries use VAT?

There are quite a lot of them. The exact number is 166. Generally speaking, every EU member state uses VAT. However, such tax laws do not apply to many overseas territories. Other countries which have VAT are Russia, China, India, Australia, New Zealand, Brazil, Turkey, Mexico, to name a few.

The USA does not use VAT as a method of taxation. Instead of that, there is a different system used.

The VAT percent varies greatly in the different parts of the world. Across the EU, the VAT is usually around 20. In the Middle East, it is often very low with Kuwait having 0 and Saudi Arabia 5. Most of the countries across Africa do not even have VAT, but are going to implement it in the near future.

Since its introduction in the 50’s, VAT has transformed the way the financial markets work. There are constant debates over if it is good or bad. But one thing is for sure: VAT is very important tax, that plays a huge role in the economies of many countries.