ACCA Advanced Taxation (ATX) Practice Exam

What is an important consequence of charging output VAT on sales?

1. It lowers the company's profitability

2. It may deter customers who are not VAT registered

3. It simplifies tax processes for the customers

4. It increases competitiveness in tax sectors

The correct answer is: It may deter customers who are not VAT registered

Charging output VAT on sales has significant implications, particularly in relation to customers who are not VAT registered. When a company includes VAT in its sales price, it effectively raises the total cost for customers who cannot reclaim this VAT due to their non-registered status. This can create a barrier for these customers, as they may seek alternatives that do not impose additional VAT costs, ultimately affecting the company’s customer base. For customers who are VAT registered, they can reclaim the VAT, so it does not directly impact them in terms of the final cost. However, those who are not registered do not have this advantage, which can lead to them either choosing not to purchase or looking for suppliers who do not charge VAT. This can have a detrimental effect on sales and customer retention for businesses that impose output VAT, especially in competitive markets where price sensitivity is evident. The other options do not provide a direct consequence of charging output VAT. Lowering profitability, simplifying tax processes, and increasing competitiveness can be influenced by various other factors beyond the imposition of output VAT on sales. Understanding this dynamic is crucial for businesses in planning their pricing strategies and targeting their marketing efforts effectively.