UK (VAT) & US Tax System

UK (VAT) & US Tax System

Introduction

The United States is one of the highest volume economy as well as an important trading partner in the international export market. Being the biggest trading partners both UK and US shares extensive amount of trade and development activities. Having the highest trading volume the businessmen of both the countries are confused related to the Taxation system. In United States they follow normal Income tax rules which is implemented in the whole world while on the other hand, the people of UK follows VAT system (Blundell, 2009).

Mechanics of a VAT

The value added tax (VAT) is a general tax on consumption applied to commercial activities involving the production and distribution of goods and services. The provisions relating to the creation of the common system of VAT from the European Union (EU) are encoded by the current VAT Directive (Attanasio & Wakefield, 2008).

The common system of VAT applies to goods and services bought and sold for consumption in the EU. The tax is calculated based on the value added to goods and services at each stage of production and distribution chain.

The tax is collected fractionally, via a system that allows partial payments of VAT to taxable persons (companies registered for VAT) deduct from their VAT account the amount of tax they have paid to other taxable persons on goods purchased for the its business during the preceding phase. This mechanism ensures the neutrality of the tax, regardless of the number of operations (Adam, 2008).

The VAT is borne ultimately by the final consumer in the form of a percentage applied to the final price of the good or service. This final price is the sum of value added at each stage of production and distribution. The supplier of the goods or the service provider ...