Time Tracer Ltd - Publishing


2nd Edition by Edwin Olima FCCA

ISBN 0-9543820-1-3










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Most Governments now levy a tax on the value of goods  or services that a business produces. This tax is called a Value Added Tax  (VAT ) also known as a Goods  & Services Tax  (GST) in other countries.


From the records that you have been compiling you will have noted that VAT  appears on both sales (Output VAT ) and purchases (Input VAT ). The rate we have assumed throughout this book is 17.5% on net value.


Output VAT less Input VAT is the Net VAT  that is payable to the Government .


In this chapter you are going to construct a summary of the Value Added Tax and compute the net amount of VAT  payable to the government.


Exercise: From your sales list and your purchases list extract the total VAT  amounts and present the values in the following format in order to compute the net VAT payable to the Government.  


VAT  Summary


VAT  on sales invoices


Less: VAT  on purchase invoices

(                             )

Net VAT  payable to the Government




Sometimes if sales are less than purchases or if the sales have a Zero Vat Rate  (exports for example), then the difference between the Output VAT  and the Input VAT  will result in the Government  paying the business VAT.


While we have summarized the basic concept of VAT  here, it is important that you contact your local Government  Agency or Accountant to get the practical details of applying VAT to your own business. This is because different rules apply to different businesses, and also to various types of goods  and services. Your Local Government Agency  or Business Adviser  will be able to guide you on the specifics.


In addition to computing the net VAT  payable to the Government , it is usual disclose to the VAT office the net value of outputs (net sales ) and inputs (net purchases ) on which VAT has been charged. Look through your sales list (Chapter 1 ) and purchases list (Chapter 2 ) to identify the amounts you would need to disclose on your VAT return.


In case you wondered where the phrase “Value Added Tax ” came from, you will note that the difference between your sales (outputs) and your purchases (inputs) is the value that your business has added to the purchases (inputs) before selling them on to customers . Hence the term Value Added and the tax thereon (VAT ).


In practice in the UK , the transactions that do not have VAT on them get excluded from the value-added computation (like the £250.00 Insurance in our example). So our VAT would be:

·         17.50% x { 23,000 – (17704.10-250.00) }        = £970.53, rather than

·         17.50% x { 23,000 – 17,704.10         }              = £926.78


Now compare your answer to the one in the answer section at the back of the book.

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