Why is VAT paid?
Value added tax - how does the principle of value added tax work?
Value-added tax is also known as sales tax and is one of the main sources of income for the state.
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The principle of VAT is very complicated and not easy to understand for many founders. This is mainly due to the many exceptions and constant changes. It is for this reason that this article considers the rationale.
When it comes to VAT, you appear as an entrepreneur as a "helper" to the tax office. Because ultimately the value added tax (sales tax) is paid by the end consumer.
As an entrepreneur, you add this VAT to your actual price (net price) on behalf of the tax office and then pay this tax to the tax office.
The income from VAT does not belong to you at any point in time: It is just a transitory item in your accounting.
How does the principle of VAT work?
The principle of VAT can best be illustrated with an example:
Imagine that you are a retailer selling office furniture. To put it simply, we assume that the entire value chain consists of only two stages - the manufacturer and you, the retailer.
The manufacturer makes a table and sells this table to you for 100 euros plus 19% VAT. So you pay the manufacturer 119 euros. The manufacturer has now withheld 19 euros VAT for the tax office in addition to its price of 100 euros.
The manufacturer must report this 19 euros to the tax office in his advance VAT return and transfer the amount to the tax office.
You have a shop with office furniture and sell the table to a private customer for 200 euros plus 19% VAT (38 euros).
So you have now received EUR 38 VAT from your customer and paid EUR 19 VAT to your supplier (the manufacturer) yourself.
The VAT system now provides that you can deduct the VAT that you paid to your supplier from the VAT that you received from your customer. This system is called input tax deduction.
Input tax is another term for value added tax / sales tax.
You calculate 38 euros - 19 euros = 19 euros for your VAT pre-registration. You therefore have to pay 19 euros in your sales tax advance payment to the tax office.
Now that the table is with the end consumer, the value chain has ended and we can look at the effects of the VAT principle:
The manufacturer created a value of 100 euros and paid a total of 19 euros to the tax office.
As a retailer, you added an additional value of 100 euros to the table and also paid 19 euros to the tax office.
Ultimately, however, the economically burdened one is the end consumer, who has to pay 38 euros sales tax at the net price of 200 euros.
It is noticeable that every entrepreneur in the value chain has to pay the tax for his added value to the tax office. The manufacturer has made the table 100 euros more expensive and has to pay 19 euros VAT and you made the table another 100 euros more expensive and also have to pay 19 euros VAT to the tax office.
Since only value added is taxed at each stage of value creation, the sales tax system is called value added tax.
Exemption from VAT
Since the VAT system is a very large administrative burden for entrepreneurs and regular VAT returns have to be submitted, there is a relief provision for small entrepreneurs.
This regulation is known as the small business regulation and enables the entrepreneur to forego the complicated calculation of VAT.
You can find more information on this in the article on the small business regulation.
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