What is Indirect Tax?

February 5, 2021

The saying goes, “The only two certainties in life are death and taxes,” and it is certainly true that tax is prevalent in pretty much every part of your life involving formalised commerce. Avoiding paying taxes is a crime, and you can find yourself in terrible trouble if you get caught doing so.

However, aside from the very obvious monthly or annual tax, you pay from your earnings, or your corporation tax returns, also known as direct tax, there is an indirect tax. Indirect tax is a tax which is passed onto a different person or entity and then handed to the government.

These are the taxes levied from goods and services, with VAT being the most obvious example. Another example of indirect tax is the excise duty on tobacco and alcohol. Most retailers include the price of the tax in their sales, but some, particularly tradespeople, will quote their prices minus VAT, meaning an extra 20% will be added on top.

The Advantages of Indirect Tax

  • It is levied on harmful products, making them less desirable to consumers. The indirect taxes on hydrocarbons also encourage use of cleaner energy cars, as opposed to fossil fuel burning ones.
  • It is easy to collect. Due to it being included in the retail price of the product, the consumer can’t accidentally avoid it or make a mistake.

The Disadvantages of Indirect Tax

  • It can be described as “a hidden tax”. If consumers don’t realise a particular product is taxed, they may have less awareness of the reasons for its taxing, so may consider things like alcohol, cigarettes and petrol to be simply expensive.
  • It is collected by an intermediary body, AKA the tradesperson or shop owner, rather than directly to the government by the consumer. This opens the door for tax fraud, whereby the consumer gets charged extra for the tax, but the intermediary steals that money as extra profit.
  • It is a regressive tax. Unlike direct tax, which is means-tested, based on how much you earn, everyone pays the same amount. This means it disproportionately affects lower-income individuals. It makes particular products, such as tampons, which were until recently subject to the luxury tax, less affordable.

To further illustrate the impact of a regressive tax, imagine two people. One earns £20,000 per year and one earns £200,000 per year. Both of them smoke and drink, and each contributes £1000 per year in their indirect taxes.

That £1000 forms a 10x higher proportion of the lower earner’s salary than the higher earner’s salary. This contributes to financial inequity.
To learn more about tax, or to have little understood concepts explained, we at Aston Black will always be happy to oblige. You can book in a free 30-minute consultation with us by filling out the form here.