VAT stands for Value Added Tax, a consumption tax charged on most goods and services in the UK. It is added to the price at a standard rate of 20%, with lower rates on some items, and it is collected by HMRC. VAT is paid in stages along the supply chain, but the cost is ultimately carried by the final customer.

How VAT Works

VAT is collected by VAT-registered businesses on behalf of HMRC. A business charges VAT on what it sells, known as output VAT, and reclaims the VAT it pays on its own purchases, known as input VAT. It then pays the difference to HMRC, or claims a refund if it has paid more than it charged. Because each business only hands over the tax on the value it adds, the full amount ends up being borne by the person at the end of the chain.

For example, if a maker sells goods to a shop for £100 plus £20 VAT, and the shop sells them on to a customer for £150 plus £30 VAT, the maker pays HMRC the £20 it collected. The shop pays the £30 it collected less the £20 it already paid, which is £10. The customer bears the full £30. A business must start charging VAT once its taxable turnover passes the VAT registration threshold.

Who Pays VAT And Who Charges It

VAT-registered businesses charge VAT, and consumers pay it. When you buy something in a shop, the price on the label already includes any VAT due, so you pay the tax as part of the total. Businesses that are not registered for VAT do not charge it, and businesses that are registered can usually reclaim the VAT on their costs, which means the tax is not a cost to them in the way it is to a consumer.

What Net And Gross Mean

Net is the price before VAT, and gross is the price after VAT has been added. A figure described as net of VAT is the amount excluding the tax, while a gross figure includes it. These two terms come up constantly with VAT, because adding VAT turns a net price into a gross one, and removing VAT turns a gross price back into a net one. You can add or remove VAT on any amount with the VAT calculator.

UK VAT Rates In Brief

The UK has three VAT rates. The standard rate of 20% applies to most goods and services. A reduced rate of 5% applies to items such as domestic energy, and a zero rate of 0% applies to items such as most food and children’s clothing. Some supplies, including insurance and financial services, are exempt from VAT altogether. The full breakdown of which rate applies to what is set out in the UK VAT rates.

A Short History Of VAT

VAT was introduced in the UK in 1973, when it replaced an earlier tax called Purchase Tax. It was brought in as a condition of the UK joining the European Economic Community. The standard rate has changed several times since then, and has been set at 20% since 4 January 2011.

What Is VAT FAQs

What does VAT stand for?

VAT stands for Value Added Tax. It is a consumption tax charged on most goods and services in the UK, at a standard rate of 20%.

Who pays VAT?

Consumers pay VAT as part of the price of most goods and services. VAT-registered businesses charge and collect it on behalf of HMRC, but can usually reclaim the VAT on their own purchases.

Is VAT the same as sales tax?

VAT is similar to a sales tax but works differently. VAT is charged in stages at each step of the supply chain, with businesses reclaiming the VAT on their costs, whereas a sales tax is charged only once at the final sale.

What is VAT charged on?

VAT is charged on most goods and services sold in the UK. Some items are charged at a reduced or zero rate, and some, such as insurance and financial services, are exempt from VAT.

What is the difference between net and gross?

Net is the price before VAT, and gross is the price after VAT has been added. Adding VAT converts a net price into a gross price, and removing VAT converts a gross price back into a net one.