How to model value-added taxes or VAT: UK/EU Retail businessSubscribe
Hey there. I'm a dumb Yankee taking my first up-close look at a UK retail business (think restaurants, etc.). How the heck do y'all deal with VAT in a DCF?
My understanding is VAT should be charged on all of these retail sales transactions. So if the company generated GBP 1MM in Q1, VAT is 200K. But it looks like there's some kind of credit for the company's costs: if they buy food, consumables, fixtures, or other non-exempt items., they can reclaim VAT.
This feels a little counter-intuitive. Those suppliers charged my company VAT and pay HMRC 20% of whatever I paid them.
Going through an example:
We generate £1,000,000 in revenue.
Our VAT liability is £200,000.
We spent $500,000.
On that, our suppliers paid £100,000.
Do we somehow get to earn a a credit for that £100,000 in suppliers' VAT, or is that money gone once it hits suppliers? Is this a mechanism the government introduced to limit double-taxation on VAT?