Posted by If you are starting a sole proprietorship, you must decide at the outset whether to become an active VAT payer, or, more popularly, whether you want to be a Vat payer. If not, you can be a non-VAT payer. This sounds rather strange, but I’ll explain in turn what VAT is and what it is for you as an entrepreneur.
Note: The following article is not legal, financial or tax advice.
VAT is a value-added tax, which is simply a tax that is always added when a good is sold. Why value added? If you run a store, buy shoes from a manufacturer, and then display them at your store, you create added value, because the customer doesn’t have to drive hundreds of kilometers to the manufacturer, but can come to you, try them on and buy the shoes. This is the value you give him compared to the manufacturer. Of course, the customer pays more for it in your store than at the manufacturer. He gets value – a facilitated purchase – and pays you the difference between the selling price in your store and buying the shoes from the manufacturer.
For the record, the excess of price over cost, described above, is called the margin.
In theory, only this margin is value added, so the customer should pay tax only on this margin. However, when you look at any store bill or invoice, there will be VAT calculated on the entire price, not just on the margin (there will be no margin listed there at all!). Is something wrong here?
No, everything is fine. One more VAT assumption has to be taken into account – as a rule, the entire VAT on a good is always to be paid by the last customer, which is simply you, if you buy shoes. VAT is therefore a tax on the last link in the business chain, the consumer. The consumer pays, and the seller remits to the tax office. Incidentally, for this reason, if you assume that all goods you buy as an individual are subject to VAT of, say, 23%, then 23% of your total expenses is, in principle, remitted to the tax office. You spend PLN 1000 on a phone? 230 PLN is transferred to the tax office. You spend 100,000 PLN on a car? 23000 PLN is transferred to the tax office. This happens in small parts and not only by the final seller, but in total you give so much money back to the state in the form of tax.
Let’s go back to the store where you bought the shoes for 246 PLN. Of this, 46 PLN is VAT, and 200 PLN is the real price of the shoes. Let’s say the store bought the shoes from the manufacturer for 100 PLN plus VAT, or 123 PLN with VAT. So it transferred PLN 123 to the manufacturer, and the manufacturer transferred PLN 23 to the tax office (in simpler terms, it really transferred probably less, because it had other costs it incurred, which were also subject to VAT). When you bought the shoes, the store received PLN 46 from you for VAT, but it had already transferred PLN 23 to the manufacturer earlier, so the store has to transfer only PLN 23 to the tax office account as VAT paid by you. For him, only PLN 200 is important, which is hidden in the price of the shoes of PLN 246. Your tax thus consisted of two parts: PLN 23 paid by the store and – previously – PLN 23 paid by the manufacturer. Quantitatively, everything is correct – you paid a tax of 46 PLN on the transaction, or 23% of the net price (200 PLN).
As you’ve probably noticed, for the store and the manufacturer, VAT is completely irrelevant to their revenues or costs. It could be as high as 100%! Of course, the higher the VAT, the less money is left in your wallet, because the tax is a component of the price. Therefore, you can’t quite say that the store and manufacturer don’t care about its amount. If it is lower – you will buy more of their products. However, this is an indirect impact, not a direct one like the actual cost of making the shoes (manufacturer) or preparing them for sale (store). Now that you know how VAT works and who pays it, and for whom it is quite indifferent (or entirely indifferent from an accounting point of view), in the next post I will describe why you need to take into account who your customers are when choosing whether to be VAT or non-VAT.