Value Added and Sales taxes

Sales tax, common in North America, is a system whereby a business charges its customers a predefined percentage tax on the sales of most goods and services. The amount charged to customers must be accounted for and paid over to the tax authorities. In fact, on a single sales transaction, you may have to charge a Federal sales tax and a State sales tax and account for these taxes to both the Federal and State tax authorities.

Sales tax paid by the business for its own purchase of goods and services is not separately identified. It is included as part of the cost of those goods and services, and charged as a business expense.

Value Added Tax, used throughout most of Europe, is a tax on the difference between the amount paid by a business for goods and services bought, and the amount charged by the business to its customers for goods and services sold. At the time of writing, there is only a single Government tax on sales and purchases. It is not inconceivable that at some future date we may have a European VAT imposed on top of each Country VAT

On the sales side, it is recorded in the same way as a Sales Tax, ie the amount of VAT charged on each sale is recorded for subsequent payment to the tax authorities.

On the purchases side, the VAT paid is also recorded separately and offset against the VAT on sales payable to the tax authorities.

This need for accurate accounting is further complicated by there being different rates of tax for different categories of goods and services. Also, if you have dealings in other Common Market countries, you may have a fairly complex set of regulations for offsetting Value Added Taxes in different countries.

Rest assured - MoneyBox handles it all. It even handles the two levels of tax on a single transaction.