What Is Sales Tax? (A Simple Guide)

business sales tax

A sales or business sales tax is levied on the final products and is included in the product’s price. Paid by the consumers, this sales tax is collected by the governments in different states.

However, many people get confused about the sales tax, as its rates and methods of collection differ from one country to another. So, it becomes difficult for them to calculate the correct sales tax while visiting or residing in other countries.

In the UK, HMRC collects VAT instead of sales tax. A sales tax and VAT are used interchangeably. This article will discuss a sales tax and how it is calculated. Moreover, we will discuss the difference between corporation and sales tax in the UK. So, let’s start!


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What is a Sales Tax?

Sales tax is applicable to most of the goods and services consumed by the end-user. It is imposed by the state or local governments and collected by them. Although businesses add this sales tax to the final price of their products and services, they are deducted from the price when sellers receive it.

The sales tax is given to the states after businesses collect it. Moreover, the sales tax rates vary from one state to another state. If you are running a brick-and-mortar business, then calculating sales tax is relatively easy. On the other hand, for businesses selling their goods and services online calculating sales tax becomes very complex for them as different states charge different rates of sales tax.


VAT or Sales Tax in the UK

VAT is a consumption tax and a business-to-business (B2B) tax in most cases. However, it is also partly paid for by the consumers. In the UK, the consumers and sellers also pay a flat VAT rate on most standard-rated goods.

Some goods are categorised as reduced-rated goods, where the VAT is charged at a rate of 5% only. Other essential goods like food are exempt from the VAT. The standard rate of goods is calculated at 20%.


Business Taxes

In the UK, HMRC collects different sales taxes. Following is a list of the business taxes that the sole traders and partnerships have to pay. For example:

  1. Corporation Tax
  2. VAT
  3. Income Tax
  4. National Insurance

Self-employed persons do not pay any corporation tax. It is a tax paid by limited companies on their profits. The due date is nine months and one day after the company’s accounting period ends. On the other hand, the VAT due date is after the thirty-seven days of the end of a quarter of a company.


Is VAT Included in the Price?

The prices of goods and services in the UK consist of VAT, and consumers are charged with it. On the other hand, the hotel bills add VAT to the bill separately. If your business is VAT registered, you can add VAT to the product’s final price.

To be eligible to collect VAT on behalf of the government, the annual turnover must be £85000. Otherwise, you can register for VAT voluntarily if your yearly income is less than the threshold. For a self-employed person, the annual turnover must be more than the personal allowance of £12,570.


How to Calculate VAT for the Price?

VAT for the price is calculated easily. The VAT is calculated as

VAT = 20%

Price = £200

VATable Price = 20% * £200

= £40

Total Price = Original Price + VAT

      = £200 + £40

      = £240

The businesses calculate the VAT by adding the annual turnover and get the 20% VAT. After this calculation, they can pay the due VAT to the HMRC in a tax year. VAT is paid after one month and seven days after the due date.


The Bottom Line

Finally, we conclude that sales tax and VAT are the same in the UK, except for the difference that VAT is a national tax. Moreover, the businesses also pay VAT on their annual turnovers. Calculating VAT requires the determination of the goods and services supplied by the sellers.

The state governments charge sales tax, with rates varying from other states. It becomes very confusing when an online business works out the sales tax when they deliver goods and services in different states. VAT is calculated at each stage of production and is paid by each seller in a supply chain. While sales tax puts all the burden on the consumers.


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Disclaimer: All the information provided in this article on Business Sales Tax, including all the texts and graphics is general in nature. It does not intend to disregard any of the professional advice.