Value Added Tax (VAT) should be a relatively simple tax – collected from businesses through the supply chain and finally borne by the final consumer in the price of goods and services purchased by them.

A timber merchant sells some wood to a furniture maker for £8,000 plus VAT. The furniture maker makes some furniture and sells it to a retail shop £10,000 plus VAT. The retail shop then sells the furniture to the final customers (the public) for £15,000 plus VAT. Assume standard rate VAT.

Required

1. Show how VAT is calculated and collected at each stage in the above furniture scenario.

2. What are the main types of supply for VAT purposes and how can these affect the amount of input tax reclaimed.

Discuss how VAT has been distorted by the registration rules, differing VAT rates, and, in some cases, the inability to reclaim input tax. How is “social justice” evident in this?