Calculation of VAT and GST Liabilities
Expert-defined terms from the Executive Certificate in Value-Added Tax (VAT) and Goods and Services Tax (GST) course at Stanmore School of Business. Free to read, free to share, paired with a globally recognised certification pathway.
Accrual Method #
A method of accounting where VAT or GST liabilities are calculated based on when invoices are issued or received, rather than when payments are made or received. This allows for more accurate tracking of tax liabilities, but can be more complex to implement.
Apportionment #
The process of dividing VAT or GST liabilities between different products or services, based on their relative value. This is typically used when a single supply contains both taxable and exempt items, and is required in order to accurately calculate the VAT or GST liability.
Cash Accounting #
A method of accounting for VAT or GST where liabilities are calculated based on when payments are made or received, rather than when invoices are issued or received. This can simplify the accounting process, but may result in less accurate tracking of tax liabilities.
Compensation Scheme #
A scheme in which businesses that have overpaid VAT or GST can claim a refund from the government, while businesses that have underpaid can be required to make additional payments. This helps to ensure that the correct amount of tax is collected, and can provide a financial benefit to businesses that are diligent in their tax reporting.
Deferment Account #
A special account set up by businesses to manage their VAT or GST payments. This account can be used to make payments to the government, and to receive refunds for overpaid taxes.
Disbursements #
Costs that are incurred by a business on behalf of a customer, such as shipping or handling fees. These costs are typically not subject to VAT or GST, and should not be included in the calculation of tax liabilities.
Exempt Supplies #
Supplies of goods or services that are not subject to VAT or GST. Examples include certain financial services, educational services, and healthcare services.
Flat Rate Scheme #
A simplified method of calculating VAT or GST liabilities, in which a fixed percentage is applied to the total value of supplies made by a business. This can simplify the accounting process, but may result in less accurate tracking of tax liabilities.
Fiscal Year #
The 12-month period used by a business for accounting and tax purposes. This may or may not align with the calendar year, and can be chosen by the business in order to best meet its financial needs.
Input Tax #
The VAT or GST paid by a business on supplies that it receives. This can be claimed as a credit against the VAT or GST owed by the business on its own supplies.
Margin Scheme #
A method of calculating VAT or GST liabilities on second-hand goods, artworks, and antiques. Under this scheme, the tax is calculated based on the difference between the purchase price and the selling price, rather than on the full selling price.
Output Tax #
The VAT or GST charged by a business on its supplies. This must be reported and paid to the government on a regular basis.
Partial Exemption #
A situation in which a business makes both taxable and exempt supplies, and is required to apportion its VAT or GST liabilities between them. This can be complex, and requires careful tracking of all supplies made by the business.
Reverse Charge Mechanism #
A mechanism used to simplify the accounting process for businesses that receive supplies from other EU countries. Under this mechanism, the recipient of the supply is responsible for accounting for the VAT or GST, rather than the supplier.
Taxable Supplies #
Supplies of goods or services that are subject to VAT or GST. These include most commercial transactions, and are typically taxed at a standard rate.
Threshold #
The amount of taxable supplies that a business can make in a year before it is required to register for VAT or GST. This threshold varies by country, and may be different for different types of businesses.
VAT #
Value-Added Tax, a consumption tax levied on the sale of goods and services in the European Union.
VAT Return #
A regular report submitted by businesses to the government, detailing their VAT liabilities and any credits or refunds due. This return must be filed on a regular basis, typically quarterly or annually.
VAT Registration #
The process of registering a business for VAT. This is typically required when a business makes taxable supplies above a certain threshold, and allows the business to charge and collect VAT from its customers.
VAT Repayment Claim #
A claim made by a business for a refund of overpaid VAT. This can be made through the submission of a VAT return, and may be subject to certain conditions and limitations.
Zero #
Rated Supplies: Supplies of goods or services that are subject to VAT or GST, but are taxed at a rate of 0%. This allows businesses to charge and collect VAT from their customers, but they do not have to pay the tax to the government.