What is VAT?

what is vat

Value Added Tax (known as ‘VAT’) put simply a tax added to the price most goods and services.  The most common rate of VAT used is 20%, but there are reduced rates and some goods which are exempt from adding VAT.

If you are shopping online or in store VAT is generally pretty invisible.  The price you see on the item you are looking at will include VAT, however if you check your receipt you will a line showing any VAT you have paid.

How Much VAT Do You Pay?

Different rates of VAT are applied according to the types of product or service you are buying since there are reduced rates available.  In effect reduced rates are used on items which are not considered luxury items, so you pay less tax to buy them. Here are the current rates in place:

Rate % of VAT What the rate applies to
Standard 20% Most goods and services eg: adult clothes, furniture, alcoholic drinks
Reduced rate 5% Some goods and services, eg: female sanitary items, children’s car seats and some energy-saving materials in the home
Zero rate 0% Zero-rated goods and services, eg: most food, coffee and children’s clothes


An End User Tax

VAT is actually a tax on consumers or the general public who are the end user of a good, product or service.  Therefore the businesses or traders who produce the goods consumers buy, depending on their size, may not have to bear the cost of this tax on the things they buy to make their product.

An Example

You buy a table online for £500. This price will include VAT of 20% and your transaction will breakdown as follows:

Price of Table £416.67

VAT 20% £83.33

Total Price of the Table £500

You as the consumer cannot claim back the VAT as the supplier does (unless you live abroad and plan to ship it out of the UK) so the price you pay for the table includes VAT and will be £500.

Let’s say the supplier who makes the table needed to buy wood for £300 including VAT to make it for you, then the breakdown of this transaction would be:

Price of wood £250.00

VAT 20% £50.00

Total cost of wood £300

The supplier would be able claim back the cost of the VAT of £50 therefore the cost of the wood to them is £250.

Note – the supplier will also pay over the VAT you pay over when you buy the table of £83.33 so only really receives £416.67 for the sale of the table.

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