Posted: 17. July 2019 by: Rupert Tennant

The Benefits of VAT

VAT is probably the most well-known tax currently paid in the UK. That’s because it’s paid on almost any transaction that an ordinary person makes within the UK while purchasing goods and services. It’s a tax on value added to the product you’re selling.

However, it’s only paid by the companies that have a turnover that’s larger than a set threshold. There is also an option of opting in for VAT instead of needing to pay, and many do so. This is because the benefits of VAT are worth the payments you’ll make.

Stable revenue base

From the perspective of the government, the most important advantage of VAT is the fact that this is a stable tax that will keep providing revenue for the years to come. Not only that, it will provide the revenue for the years to come, but it will do it in a relatively stable manner meaning that the government knows on how much income it can count on.

This is because the tax is based on consumption, and there will always be a need for consumption, and the economy will continue to work even when companies change and disappear.

It’s neutral

This is a neutral tax, meaning that it’s a tax that will be paid by everyone that is above a certain threshold. It doesn’t target one industry over another or one type of transactions of another. This is what makes the tax seem fair and simply a way that things are done.

In turn, that will mean that more businesses would cooperate with the tax authority, and there will be fewer problems with recording tax data and paying your taxes in an organized and well-regulated way. Taxes such as this are rather rare.

Controlling costs

It’s not possible or wise for the governments to control the costs of products, with an exception of a few rather selective industries. However, the government could provide incentives to do so. One of these is the VAT tax itself.  Since the tax is the percentage of the value-added, it gets higher as the prices are higher.

This will make the businesses think twice before raising prices since every raise also raises taxes. Have in mind that those costs will be moved to the last consumer meaning the person making a purchase. However, that can drive away the consumers from a business, and that’s why they wouldn’t raise the price.

Broadening the base

When the government wants to increase its revenue, it can be done in one of two ways. By increasing the rates paid or by making the base broader and keeping the same rates. The second option is better because it appears to be fairer and doesn’t require any change in the existing system for those who already pay the tax.

This makes VAT the best option to increase the revenue of the government since it can keep the infrastructure and simply lower the threshold after which it is paid.

Easy to plan

The worst thing about a tax is that it can come up with an unexpected tax for which the company hasn’t prepared for. That’s not the case with VAT, and that’s what makes it such a great way to collect revenue for the budget.

Since the system is clearly set and you’ll know what your rate is from day one and when you need to make the payments – VAT is an easy tax to plan for from the perspective of the businesses paying it. That makes budgeting easier, as well.

Downsides

These are the benefits of VAT, and they are noticeable, but there are also downsides of this set up as well. The most noticeable of these is the fact that it will mean an additional expense from the consumer. That’s something that can scare of some businesses from this tax.

At the same time, there are those who say that this is a regressive tax, meaning that it punishes those who make more. This can be true since those who are close to the threshold may want to earn less in order not to need to pay the tax at all.

Conclusion

There are many benefits of having a value-added tax. That’s because this is a tax that makes it easy to plan the future financial dealings for both the government and the companies that pay this tax. At the same, time it’s a fair tax since it’s paid if you’re above a threshold and regardless of the type of business you’re running.

The tax can bring in more money to the budget when needed without increasing the rates and by simply broadening the taxpayer base of those payments are the taxpayers of this kind. It’s done by lowering the allowance.

Category: . Tags: