How to Withhold VAT

Value-added tax is a type of consumption tax charged on goods and services in many countries across the globe. It is similar to sales tax in the United States -- a percentage of the sales price of taxable goods and services is collected and forwarded to the taxing authority. VAT is withheld even when businesses sell goods to each other and when businesses sell goods to entities outside their home country.

Instructions

1. Write the VAT rate as a decimal. For example, if the VAT rate is 20 percent then 20 percent expressed as a decimal is 0.20.

2. Multiply the decimal you calculated in Step 1 by the sales price of the item. For example, if the sales price of the item is £1000, then 0.20 multiplied by £1000 equals 200.

3. Charge the customer the amount you calculated in Step 2, the VAT, in addition to the sales price. In the above example, the total sales price would be £200 plus £1000, for a total of £1200.

4. Forward the withheld VAT to your taxation authority.

Tips & Warnings

• Check the requirements for withheld VAT in your country. You may be required to send the payments in as you withhold them or you may be able to send them in periodically as a lump sum.

References

• HM Revenue and Customs: Introduction to VAT
• Ethiopian Reporter: MoFED Issues New Directive on VAT
• RSM McGladrey: The European Value Added Tax: Recent Changes, Pitfalls and Planning Opportunities for U.S. Companies