Re: Make it attractive to pay tax
how does it work for a firm that's vertically integrated and can go straight from source to consumer?
A fair question, but the answer is "exactly the same". In theory VAT is passed all through the chain, but in practice companies don't charge other companies VAT so long as the receiving company is properly VAT registered. What happens is that companies have to account on paper for VAT whenever they buy or sell goods to any person or different company not in the same VAT group, but in cash terms VAT only gets charged by the final retailer when selling to a consumer or non-VAT registered business, at 20% of the price.
If the producer and distributor is the same entity as the retailer (eg a farmer) then it still works the same way, that retail buyers get charged 20%.