VAT and GST Reverse Charge Mechanism
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 revenues and expenses are r… #
This is in contrast to the cash method, where revenues and expenses are recorded when cash is received or paid.
Apportionment – The process of dividing an input tax credit between taxab… #
Apportionment – The process of dividing an input tax credit between taxable and exempt supplies in proportion to the amount of tax that would have been paid on those supplies if they had been taxable.
Business – An activity carried on with the intention of making a profit #
This can include any trade, profession, or occupation, as well as the provision of goods or services.
Capital Goods – Goods that are used for the purpose of making taxable sup… #
These goods are subject to special rules for claiming input tax credits.
Cash Method – A method of accounting where revenues and expenses are reco… #
This is in contrast to the accrual method, where revenues and expenses are recorded when they are incurred.
Consideration – The amount of money or other valuable consideration paid… #
Consideration – The amount of money or other valuable consideration paid or payable for a supply of goods or services.
Customs Duty – A tax imposed on imported goods, based on the value of the… #
Customs Duty – A tax imposed on imported goods, based on the value of the goods and the country of origin.
Deemed Supply – A supply that is treated as taking place for VAT purposes… #
This can include things like the transfer of assets between related parties or the provision of goods or services to employees.
Exempt Supply – A supply that is not subject to VAT #
Examples include certain financial services, educational services, and medical services.
Exemption – A relief from paying VAT on a supply of goods or services #
Exemptions are typically granted for certain types of supplies that are considered to be important for social or economic reasons.
Fiscal Year – A 12 #
month period used for accounting and tax purposes. The fiscal year does not have to coincide with the calendar year.
Going Concern – A business that is expected to continue operating for the… #
This is an important concept in VAT, as the sale of a going concern is typically not subject to VAT.
Goods and Services Tax (GST) – A type of value #
added tax (VAT) that is levied on the supply of goods and services. GST is a broad-based consumption tax that is charged at each stage of the production and distribution process.
Input Tax – The VAT paid on the purchase of goods or services that are us… #
Input tax can be recovered by businesses through the input tax credit mechanism.
Input Tax Credit – A mechanism that allows businesses to recover the VAT… #
Input Tax Credit – A mechanism that allows businesses to recover the VAT paid on the purchase of goods or services that are used for the purpose of making taxable supplies.
Intra #
Community Supply – A supply of goods or services that takes place between two EU member states.
Invoice – A document that shows the amount of VAT charged on a supply of… #
Invoices are an important part of the VAT system, as they provide evidence of the tax paid and allow businesses to claim input tax credits.
Margin Scheme – A special VAT scheme that applies to the sale of second #
hand goods, works of art, and antiques. Under the margin scheme, VAT is only charged on the difference between the purchase price and the selling price of the goods.
Output Tax – The VAT charged on the supply of goods or services #
This is the amount of VAT that businesses must remit to the government.
Place of Supply – The location where a supply of goods or services takes… #
The place of supply determines which country has the right to tax the supply.
Reverse Charge Mechanism – A mechanism that shifts the responsibility for… #
This is typically used in cases where the supplier is not established in the country where the supply is taking place.
Taxable Person – A person who is required to be registered for VAT becaus… #
This can include businesses, self-employed individuals, and other organizations.
Taxable Supply – A supply of goods or services that is subject to VAT #
Taxable supplies are typically subject to a standard rate of VAT, although reduced rates may apply in certain cases.
Value #
Added Tax (VAT) – A type of consumption tax that is levied on the value added to goods and services at each stage of the production and distribution process. VAT is typically charged at a standard rate, but reduced rates may apply in certain cases.
Zero #
Rated Supply – A supply of goods or services that is subject to VAT at a rate of 0%. Zero-rated supplies are still considered to be taxable supplies, but no VAT is charged on them. Examples include exports and certain types of food.