What Is Sales Tax and How to Account for It?


Taxation is something many business owners worry about. The process of keeping your accounts and completing the necessary forms to submit a tax return can be a source of stress. One of the main reasons taxes can feel so daunting is they can seem complicated and time-consuming to understand. Sales tax and VAT are two subjects that cause particular confusion to many business owners. So what exactly is sales tax, and how do you account for it?

What is Sales Tax?

Sales tax and value-added tax (VAT) are often used interchangeably. While sales tax is connected to VAT, it does have a distinct difference. VAT is a charge applied at every stage of a transaction when goods and supplies are purchased. So, the final product you sell in your shop has had VAT charged each time its materials and components have been sold. So, the manufacturer who purchased the raw materials to make the product would have paid VAT, and VAT would also have been paid on the separate components needed to create the finished product. VAT will also have been paid to the company that created the packaging for the product. You will then have paid VAT on the item when purchasing it as stock for your store or materials for your business. But, the customer at the end of the supply chain pays the sales tax on the product. You and the others in the supply chain can then reclaim the VAT paid during the process of creating the product. So, the final sales tax is paid for by the consumer.

For accounting purposes and to fill in VAT returns, sales tax is referred to as output tax, as this is the VAT you charge your customers for your products and services. Input tax refers to the VAT you have paid to suppliers for goods and services for your business, and this can be reclaimed.

How to Account for Sales Tax?

There are several ways to account for sales tax, and you must keep accurate records of your sales so that you can fill in your VAT return each year. Tracking your output VAT and input VAT, as mentioned above, is essential. But, different accounting schemes can be used when recording and submitting your VAT return. Examples of these include:

  • Cash accounting
  • Flat-rate scheme
  • Annual accounting
  • Margin scheme
  • Retail scheme

Which accounting method or scheme you use will very much depend on your business’ annual turnover and how much VAT you could be liable to pay, whether you deal with VAT exempt goods, and which industry you operate in.

Navigating your way through sales tax and completing your VAT return can feel like a lot of pressure. Working with the experts at Smart Solutions Taxation & Accounting will help ease the pressure of understanding sales tax and get your VAT return completed correctly and on time. Getting professional help for this often time-consuming task will leave you free to focus on driving your business forward for another successful financial year.


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