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This has always confused me - maybe somebody can help me. I still don't understand how just re-selling something at a profit is 'adding value' in VAT terms. I

This has always confused me - maybe somebody can help me. I still don't understand how just re-selling something at a profit is 'adding value' in VAT terms. I thought the 'value' added was not monetary but actually doing something to the product(s) to make them more valuable. http://www.investopedia.com/terms/v/valueaddedtax.asp http://www.investopedia.com/terms/v/valueaddedtax.asp

tinco 13y ago
Money is an expression or a carrier of value. If you do something to the product, that only adds value when you sell it for more than it was worth before. Adding value to something can be as simple as buying it in a time when no one needs it, and selling it when everyone wants it. Basically you added value by carrying risk or storing the asset.
tspiteri 13y ago
With a 20% VAT rate, I buy something at 1.20 (1 + 0.20 VAT). So in effect I paid 0.20 as tax. Then I sell it at 1.80 (1.50 + 0.30 VAT). So I have collected 0.30 as tax. But I do not pass on all of the 0.30 tax to the government, I subtract the 0.20 I have already paid as VAT, and give the government 0.10. In effect, the consumer has paid the 0.30 VAT on the final price of 1.50 excluding VAT. I find the definitions in the investopedia link you provided very confusing.
- Swannie 13y ago
  Well explained. Essentially becoming VAT registered turns you into a tax collector :-)
rlpb 13y ago
The terminology is based around the traditional business model of physical goods. Buy stuff, put them together, sell the result. You reclaim the VAT on your purchases, and charge VAT on your sales. Thus the net VAT you collect is on the "value added". But you collect and your customer pays the full (eg. 20%) on the full sale amount, since he's paying for the complete value added all the way down the supply chain. This is effectively the same as a sales tax; just the mechanism for collection is different. For service-orientated businesses, the mechanism is the same; the terminology just makes less direct sense. In general, a business still get to reclaim all the VAT it pays on stuff it buys, and must charge VAT on all the stuff it sells.
PeterisP 13y ago
Distribution is value as well - for example, it's quite clear (and traditional) that wholesalers and retailers add value to product, i.e., a shirt in a store near you where you can try it on is worth much more than the exact same shirt in a container coming out of the factory. But technically, it's exactly the same as simply reselling something at a profit. In essence, the unstated assumption is that if you bought it at $1 then it had a value of $1; and if you sell it at $2 then you added value, and we don't need to know how that value was added. Did you improve the item itself? Did you move the item where it was needed more? Did you offer it to customers who weren't served by others? Did you advertise&market the item to make it more attractive? These all are valid means of adding value.

tinco 13y ago

Money is an expression or a carrier of value. If you do something to the product, that only adds value when you sell it for more than it was worth before. Adding value to something can be as simple as buying it in a time when no one needs it, and selling it when everyone wants it. Basically you added value by carrying risk or storing the asset.

tspiteri 13y ago

With a 20% VAT rate, I buy something at 1.20 (1 + 0.20 VAT). So in effect I paid 0.20 as tax. Then I sell it at 1.80 (1.50 + 0.30 VAT). So I have collected 0.30 as tax. But I do not pass on all of the 0.30 tax to the government, I subtract the 0.20 I have already paid as VAT, and give the government 0.10. In effect, the consumer has paid the 0.30 VAT on the final price of 1.50 excluding VAT. I find the definitions in the investopedia link you provided very confusing.

Swannie 13y ago
Well explained. Essentially becoming VAT registered turns you into a tax collector :-)

rlpb 13y ago

The terminology is based around the traditional business model of physical goods. Buy stuff, put them together, sell the result. You reclaim the VAT on your purchases, and charge VAT on your sales. Thus the net VAT you collect is on the "value added". But you collect and your customer pays the full (eg. 20%) on the full sale amount, since he's paying for the complete value added all the way down the supply chain. This is effectively the same as a sales tax; just the mechanism for collection is different. For service-orientated businesses, the mechanism is the same; the terminology just makes less direct sense. In general, a business still get to reclaim all the VAT it pays on stuff it buys, and must charge VAT on all the stuff it sells.

PeterisP 13y ago

Distribution is value as well - for example, it's quite clear (and traditional) that wholesalers and retailers add value to product, i.e., a shirt in a store near you where you can try it on is worth much more than the exact same shirt in a container coming out of the factory. But technically, it's exactly the same as simply reselling something at a profit. In essence, the unstated assumption is that if you bought it at $1 then it had a value of $1; and if you sell it at $2 then you added value, and we don't need to know how that value was added. Did you improve the item itself? Did you move the item where it was needed more? Did you offer it to customers who weren't served by others? Did you advertise&market the item to make it more attractive? These all are valid means of adding value.