Introduction to Value Added Tax

Value-added tax (VAT) is a consumption tax, meaning that it is a tax on the purchase of a product or a service. VAT is placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.

VAT is commonly known as an indirect tax charged on taxable imports and the added value to taxable goods and services, supplied to one business to another or to a final consumer.

VAT is a tax charged on most business transactions. Businesses add VAT to the price they charge when they provide goods and services to:

If a business is VAT registered, they can reclaim the VAT they’ve paid on purchases. The difference between what they’ve charged on sales and what they’ve paid on purchases must be sent to the Tax Revenue Authority. If this is a negative figure, then it means they’ve more to reclaim then they’ve charged, and Tax Revenue Authority will send the business the amount due.

Any business selling VATable products or services can become VAT registered. Once VAT registered, a business will need to charge VAT at the applicable rate on all VATable sales to its customers.

How does VAT Works?

VAT is levied on the gross margin at each point in the manufacturing-distribution-sales process of an item. The tax is assessed and collected at each stage, in contrast to sales tax that is only assessed and paid by the consumer at the very end of the supply chain.

VAT registered businesses charge VAT on their sales (“output tax”) and recover VAT on their purchases and expenses (“input tax”) and pay the difference to Tax Revenue Authority. They submit returns to their tax authorities on a regular basis where they declare the value of their output tax and input tax in that period which is accompanied by the relevant payment.

Here is an example showing how the system works by giving examples of a manufacturer and retailer involved in the purchase and sale of computers.

Process1 ✅

A manufacturer purchases goods and services costing 600,000 plus VAT @20% ie 120,000. He purchases them from a range of suppliers each of whom is registered for VAT and charges VAT on their supplies. He makes a number of computers that he sells to a retailer for 1million plus VAT @20% ie 200,000.

The manufacturer’s VAT return shows the following:

  • Output tax: 200,000 payable to Tax Revenue Authority.
  • Input tax: 120,000 reclaimable from Tax Revenue Authority.
  • Net tax payable: (200,000 - 120,000): 80,000.
Process-2  ✅

The retailer sells all of the computers to retail customers for a total of 1,500,000 plus VAT @20% ie 300,000.

The retailer’s VAT return shows the following:

  • Output tax: 300,000 payable to Tax Revenue Authority.
  • Input tax: 200,000 reclaimable from Tax Revenue Authority.
  • Net tax payable: (300,000 - 200,000): 100,000.

Each business involved in the manufacturing and retailing of the goods – from the businesses who supply goods and services to the manufacturer – to the manufacturer right through to the retailer - creates a “chain of supply” and the VAT is collected in stages from the businesses rather than from the retailer at the point of final sale.

How VAT is Charged and Accounted For?

If you are VAT-registered, the VAT you add to the sale price of your goods or services is called your 'output tax'. The VAT you pay when you buy goods and services for your business and the VAT you paid to Customs is called your 'input tax'.

vat calculation

VAT-registered businesses Responsibilities.

If you are a VAT-registered business, you will:

MOBIVAT is a system that collects the VAT due on each transaction at the point it is traded. The VAT payable is not deposited into the              merchant’s bank account but is immediately transferred to the relevant tax authority.

MobiVAT tracks each transaction and ensures that allowable VAT reclaims are paid rapidly and automatically – in the case of electronic              payments this can be on the same day as the collection.

In all transactions in which VAT is due, the VAT component is automatically split from the payment at the point of payment or third party settlement facility. The VAT never reaches the merchant’s bank account, removing the necessity of accounting for and submitting payment of the collected VAT at the end of a payment period.

The system automatically creates an audit trail for submission to the Tax Authority Revenue, with a direct daily settlement of the net collected funds. In business to business transactions, all businesses, down to the smallest SME, receive rapid VAT refunds of allowable input VAT , with those using an electronic payment method processed most quickly.

Note: If you are not VAT-registered then you cannot reclaim the VAT you pay when you purchase goods and services.

When to register?

To be registered for VAT you need to be "in business". This means that you are carrying on any continuing activity which is mainly concerned with making supplies of goods or services to others in return for a consideration. If you make an isolated or "one-off" sale you are not considered to be "in business" for VAT purposes.