VAT Chain

The VAT chain diagram below describes the following sales transactions:

1. A forrester harvests wood and sells this to a furniture maker. He charges £240 ie £200 net price plus 20% VAT (£40) making a total price of £240.

2. The furniture maker buys the wood (paying £240), makes a chair and sells this either to a customer (1st scenario) or a retailer (2nd scenario). In both cases the chair is sold for £600 which is £500 net price plus £100 VAT.

3i. In scenario 1, the customer receives the chair having paid £600, as per the diagram below.

VAT chain 1


3ii In scenario 2, the retailer buys the chair for £600 and sells this for £1,200 ie £1000 net price plus £200 VAT as per the diagram below

VAT chain 2

 

The diagram describes the flow of VAT as the chair progresses through the companies. The concepts of output VAT and input VAT are shown, these are described later.