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Personal end-consumers of products and services cannot recover VAT on purchases, but businesses are able to recover VAT where they use the supplies that they receive that bear VAT to make further supplies that also bear VAT. In this way, the total tax levied at each stage in the economic chain of supply is a fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. VAT was invented because very high sales taxes and tariffs encourage cheating and smuggling.
A common VAT system is compulsory for member states of the European Union. The EU VAT system is imposed by a series of European Union directives, the most important of which is the Sixth VAT Directive, Directive 77/388/EC. Nevertheless, member states have negotiated VAT exemption or variable rates for regions or territories. The Canary Islands, Ceuta and Melilla ( Spain), Gibraltar ( UK) and Åland Islands ( FinlandSuomen TasavaltaRepubliken Finland ( In Detail) ( In Detail) National motto: None Official languages Finnish and Swedish Capital Helsinki President Tarja Halonen Prime minister Matti Vanhanen Area Total % water Ranked 64th 337,030 km² 9. 4% Population Tot) are exempt from VAT, while Madeira ( PortugalRepublica Portuguesa ( In Detail) National motto: None Official language Portuguese 3 Capital Lisbon President Jorge Sampaio Prime Minister Pedro Santana Lopes Area Total % water World ranking: 109th 92,391 km²0. 5 % Population Total ( 2004) Density World) is allowed to levy variable rates.
Under the EU system of VAT, where a person carrying on an economic activity supplies goods and services to another person, and the value of the supplies passes financial limits, the supplier is required to register with the local taxation authorities and charge its customers, and account to the local taxation authority for, VAT (although the price may be inclusive of VAT, so VAT is not paid in addition to the agreed price, or exclusive of VAT, so VAT is payable on top of the agreed price). In the UK, Customs and ExciseIn the UK, Her Majesty's Customs and Excise is a department of the British Government. It is responsible for the collection of Value Added Tax, Customs Duties, Excise Duties, and other indirect taxes such as Air Passenger Duty, Climate Change Levy, Insura is responsible for administering VAT.
VAT that is charged by a business and paid by its customers is known as output VAT (that is, VAT on its output supplies). VAT that is paid by a business to other businesses on the supplies that it receives is known as input VAT (that is, VAT on its input supplies). A business is generally able to recover input VAT to the extent that the input VAT is attributable to its taxable outputs. Input VAT is recovered by setting it against the output VAT for which the business is required to account to the government, or, if there is an excess, by claiming a repayment from the government.
The minimum standard rate of VAT throughout the EU is 15%, although different rates apply in the various EU member states. Reduced rates of VAT, as low as 5%, are applied in various states on various sorts of supply (for example, domestic fuel and power in the UK).
The Sixth VAT Directive requires certain goods and services to be exempt from VAT (for example, postal services, medical care, insurance, betting), and certain other goods and services to be exempt from VAT but subject to the ability of an EU member state to opt to charge VAT on those supplies (such as land and financial services). Input VAT that is attributable to exempt supplies is not recoverable, although a business can increase its prices so the customer effectively bears the cost of the VAT.
Finally, some goods and services are "zero rated" (otherwise known, in European language, as exempt with the right to deduct input VAT). This means that no VAT is charged on the supply of those goods and services (i.e. they are effectively exempt), but the supplier is still able to recover input VAT attributable to these supplies. This effectively provides a governmental subsidy for these supplies. In the UK, examples include most food, books, drugs, and certain kinds of transport. Similar treatment applies to goods and services which are "exported" from the EU.
VAT is generally charged as a customs duty when goods enter the EU. "Acquisition" VAT is payable when goods are acquired from another EU member state. EU businesses are often required to charge themselves VAT under the reverse charge mechanism where services are received from another member state or from outside of the EU.
Businesses can be required to register for VAT in EU member states, other than the one in which they are based, if they supply goods via mail order to those states, over a certain threshold.
Finally, following changes introduced on July 1July 1 is the 182nd day of the year (183rd in leap years) in the Gregorian Calendar, with 183 days remaining. Events 1097 Battle of Dorylaeum Crusaders under Bohemond of Taranto defeat a Turkish army under Qilich Arslan I. 1690 Battle of the Boyne as reck, 20032003 is a common year starting on Wednesday (link will take you to calendar), and also: The International Year of Freshwater The European Disability Year Summary Perhaps the defining global event of the year 2003 was the Invasion of Iraq launched by the U (under Directive 2002/38/EC), non-EU businesses providing digital electronic commerce and entertainment products and services to EU countries are also required to register with the tax authorities in the relevant EU member state, and to collect VAT on their sales at the appropriate rate, according to the location of the purchaser. Alternatively, under a special scheme, non-EU businesses may register and account for VAT on only one EU member state, but the rates of VAT charged to the customer must be those applicable in the member state where the purchaser is located.
The differences between different rates of VAT was often originally justified by certain products being "luxuries" and thus bearing high rates of VAT, whereas other items were deemed to be "essentials" and thus bearing lower rates of VAT. However, often high rates persisted long after the argument was no longer valid. For instance, France taxed cars as a luxury product (33%) up into the 1980s, when most of the French households owned one or more cars. Similarly, in the UK, clothing for children is "zero rated" whereas clothing for adults is subject to VAT at the standard rate of 17.5%.