Best Practices for VAT and GST Management
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 only recorded when cash is received or paid. Accrual accounting provides a more accurate picture of a company's financial health, but can be more complex to implement.
Ad Valorem – A Latin term meaning "according to value #
" In the context of VAT and GST, ad valorem taxes are calculated as a percentage of the value of the goods or services being taxed. This is in contrast to specific taxes, which are calculated based on a fixed amount per unit of goods or services.
Apportionment – The process of dividing a transaction into multiple parts… #
This is often necessary when a single transaction involves both taxable and exempt goods or services. The taxable portion of the transaction is subject to VAT or GST, while the exempt portion is not.
Bad Debt – A debt that is unlikely to be collected by a business #
In the context of VAT and GST, bad debts can create a cash flow problem for businesses because they have already paid VAT or GST on the invoice, but may not be able to recover the associated input tax credit.
Business to Business (B2B) – Transactions between two businesses #
In the context of VAT and GST, B2B transactions are typically subject to the reverse charge mechanism, where the recipient of the goods or services is responsible for accounting for the VAT or GST.
Business to Consumer (B2C) – Transactions between a business and a consum… #
In the context of VAT and GST, B2C transactions are typically subject to the standard rate of VAT or GAT, which is paid by the consumer.
Cash Method – See Accrual Method #
Cash Method – See Accrual Method.
Compensation Scheme – A mechanism used in some countries to reimburse bus… #
This is often used in the context of exports, where the compensation scheme allows businesses to recover the VAT or GST they have paid on inputs used to produce goods or services that are exported.
Consideration – The payment or other benefit that is exchanged for goods… #
In the context of VAT and GST, consideration is used to determine the taxable amount of a transaction.
Deemed Supply – A supply that is treated as taking place for VAT or GST p… #
Deemed supplies can arise in a number of situations, such as when a business disposes of assets or when a business makes exempt supplies.
Domestic Reverse Charge – A mechanism used in some countries to simplify… #
Under the domestic reverse charge, the recipient of the goods or services is responsible for accounting for the VAT or GST, rather than the supplier.
Exempt Supplies – Supplies that are not subject to VAT or GST #
Examples of exempt supplies include financial services, residential rent, and certain educational and healthcare services.
Fiscal Year – A 12 #
month period used for accounting and tax purposes. The fiscal year does not have to correspond to the calendar year and can be chosen by the business for its own convenience.
Free Zone – A designated area where goods can be imported, stored, and re #
exported without incurring VAT or GST. Free zones are often used by businesses to streamline their supply chains and reduce costs.
Input Tax – The VAT or GST paid on inputs, such as goods and services use… #
Input tax can be recovered by businesses that are registered for VAT or GST, up to the amount of output tax they have charged on their sales.
Input Tax Credit – The mechanism by which businesses can recover the inpu… #
Input tax credits can be claimed by businesses that are registered for VAT or GST, up to the amount of output tax they have charged on their sales.
Intra #
Community Supply – A supply of goods or services between two EU member states. Intra-Community supplies are subject to special VAT rules, which are designed to simplify the VAT treatment of cross-border transactions within the EU.
Invoice – A document that provides evidence of a supply of goods or servi… #
In the context of VAT and GST, invoices must contain certain information, such as the VAT or GST registration number of the supplier, the VAT or GST rate applied, and the amount of VAT or GST charged.
Marginal Scheme – A simplification measure used in some countries for the… #
Under the marginal scheme, the VAT or GST is calculated as a percentage of the margin made on the sale of the goods, rather than the full selling price.
Output Tax – The VAT or GST charged on sales of goods or services #
Output tax is paid to the government by businesses that are registered for VAT or GST.
Place of Supply – The location where a supply of goods or services takes… #
The place of supply determines which country's VAT or GST rules apply to a transaction.
Registration Threshold – The level of turnover at which a business is req… #
Businesses that are below the registration threshold are not required to register or charge VAT or GST on their sales.
Reverse Charge Mechanism – A mechanism used in some countries to simplify… #
Under the reverse charge mechanism, the recipient of the goods or services is responsible for accounting for the VAT or GST, rather than the supplier.
Standard Rate – The normal rate of VAT or GST, which is applied to most t… #
The standard rate varies from country to country, but is typically around 15-20%.
Taxable Supplies – Supplies that are subject to VAT or GST #
Taxable supplies include most goods and services that are sold for consideration.
Tax Point – The time at which VAT or GST becomes due on a supply of goods… #
The tax point is usually the earlier of the invoice date or the date on which payment is received.
Triangulation – A situation where a supply of goods or services involves… #
Triangulation can create complex VAT issues, as the VAT rules of three different countries may apply to the transaction.
Zero #
Rated Supplies – Supplies that are subject to VAT or GST, but are taxed at a rate of 0%. Zero-rated supplies include exports, certain food items, and certain medical supplies. Businesses that make zero-rated supplies are still required to register for VAT or GST, but can recover the associated input tax.
VAT – Value #
Added Tax, a consumption tax levied on the value added to goods and services at each stage of production and distribution. VAT is a type of indirect tax, meaning that it is collected by businesses on behalf of the government.
GST – Goods and Services Tax, a consumption tax levied on the supply of g… #
GST is a type of indirect tax, meaning that it is collected by businesses on behalf of the government. GST is similar to VAT, but is used in some countries instead of VAT.