What Is VAT Payable?

Value Added Tax (VAT) is a consumption tax levied in many countries around the world, including member countries of the European Union. VAT is similar to sales tax in the United States; a portion of the sales price of a taxable item or service is charged to the consumer and forwarded to the taxation authority.

VAT Systems

There are several different VAT systems around the world. According to UK Incorp, member states of the European Union (EU) have a compulsory, common VAT system. Some countries, like Australia, Canada, New Zealand and Singapore, call VAT a goods and services tax (GST).

Registering to Collect VAT

Businesses are required to register with the government whenever they are conducting an activity that involves the sale of taxable goods and services. In some countries, like the EU member states, businesses are required to register for VAT only when their turnover exceeds a certain threshold. For example, in the United Kingdom, the threshold is £70,000.

VAT Payable

VAT registered businesses collect VAT on behalf of the government. Businesses add a certain percentage of the sales price as VAT and charge the full amount to the customer. For example, if a VAT registered dealer sells a car for £10,000 and the VAT rate is 20 percent, then the dealer charges the customer £12,000. The dealer then forwards the £2,000 to the government. The amount that the dealer is required to forward to the government is called VAT payable.

When Businesses Pay

Businesses don't have to forward every individual sale to the government at the time of sale. Instead, businesses go by a time period set forth by their government. For example, businesses in the EU report their taxes every quarter and send the government a payment for the full amount of VAT collected during that time period. The amount of VAT collected is called VAT paid.

Exemptions

Businesses don't have to forward the full amount of VAT to the government if they have paid VAT on purchases during the quarter. They can deduct the amount of VAT they have paid from the VAT payable to the government. For example, if a business has collected €10,000 during the quarter but has paid €1000 VAT on tools and supplies, then the business will owe the government €10,000 - €1,000 = €9,000.

References

• European Union: What is VAT?
• UK Incorp: When to Register for VAT
• HMRC: VAT

Resources

• Read this Article in Spanish