A taxation system has many apparent benefits, yet it requires a deeper look at understanding how a positive benefit can manifest itself. VAT (Value Added Tax) currently sits at 20% in the United Kingdom as of 2011. A tax net such as VAT encompasses the consumer, business, as well as service based industries, so how can these distinct separate entities benefit from a single VAT system?
VAT’s predominantly leveled at retailer level. It’s relevant to all who purchase an item, product, service etc. so it’s impossible to avoid contributing to this tax level. Instead of targeting a specific group or sector at random, VAT has in fact equal coverage. It’s in essence a generic capture-all tax system bringing all transactions into a taxable sphere. Furthermore it’s a consumption based tax so a government can recuperate money as people consume greater products, often stabilising national debt while increasing GDP (Gross Domestic Product).
Furthermore VAT also acts as a stabiliser preventing run-away pricing strategies. As each seller attempts to increase price, the VAT stays the same for all parties. With this additional add-on cost, VAT deters unnecessary price increases as a healthy competitor can see a room to reduce the price. This benefits the consumer tremendously.
Retailer and buyer have a common interest in increasing the undercharging factor of the actual item versus the already known VAT amount. This helps drive prices of products down as both parties already understand an additional 20% needs adding to the sale price.
Avoiding VAT through fraud or a scam’s stopped quickly as it’s then applied at the next transaction level, therefore reducing tax avoidance escalating. Of course initial taxation remains lost to the government in the first instance, however the ability to recuperate VAT at the next transaction level stops the avoidance spreading.
VAT allows cross-auditing to occur as each company can deduct the VAT from its business-to-business sale price through reclaiming the VAT back. Only the buyer or consumer ends this cross-audit check, as they remain unable to recuperate the VAT unless they’re VAT registered.
Select groupings, products, or business entities will all have taxation simultaneously, or at separate instances. The VAT system allows for the creation of a tax group, releasing confusion from a capital based taxation, to a consumption based system. Co-ordination between business and collection agencies such as HMRC helps to reduce fraud. VAT’s reclaimable so there remains little necessity or urgency in avoiding payment.
VAT remains predominantly UK or Europe centered, which allows other non-VAT countries to seek a refund. VAT reclaims remain a very lucrative aspect of international business. Driving costs of actual purchasing lower per item than traditional non-VAT markets may allow.
Many benefits exist to the VAT system, from international trade, to the consumer, to assisting in government tax collection, even establishing anti-fraud strategies. VAT tax as a further benefit, can always face reduction from a government to help alleviate fiscal pressure from a certain subgroup. Taxes may always exist as a certainty, and so hopefully will the benefits too.