How Does VAT Work?
Let’s take the following example based on the usual rate of 17.5 per cent.
I set up a business making homemade soaps. In order to do this I have to buy in raw materials from a wholesaler and I pay VAT on these items at 17.5 per cent.
I am registered for VAT. I can claim back the VAT that I have paid on these raw materials from HM Customs and Excise. The tax that I can claim back is what is known as `input tax’. This is done by making what is known as a return to Customs and Excise.
However, I can only do this if my business is registered for VAT. Otherwise I cannot claim back the VAT.
Then as soon as I sell these goods to my customers I must charge VAT at 17.5 per cent. The VAT I charge my customers must then be given to HM Customs and Excise and is what is known as `output tax’.
The mechanism by which you pay Customs and Excise is by completing a return. So my return to Customs and Excise will comprise of two taxes output and input tax.
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