What is VAT?
What is VAT? Quite often when you buy goods you will notice the three letters VAT – often followed by a price increase of that item.
VAT stands for Value Added Tax and is a tax charged to the final consumer of a product.
Value Added Tax in the UK
This is normally charged at 20% of the product’s cost. For example a £100 product would have £20 value added tax, therefore you pay £120 in total. The business that you pay for the item (at a later date) will pay the collected value added tax to HM Revenue and Customs.
Not everything is liable to VAT at 20%. Some things have no VAT to pay on them at all.
There are three rates of VAT:
- Standard rate at 20%
- Reduced rate at 5%
- Zero Rate at 0%
The 0% rate is mainly reserved for items considered essential. These are things like; simple food and clothes for babies. This helps to ensure these products are more affordable.
The reduced 5% rate is usually for items which are beneficial such as utilities that provide heat and power to a home, or some non essential medical products like nicotine patches.
A standard rate is applied to just about everything else that is considered a luxury item. These are things such as; cooked food, toys, tools and many other products.
If you would like to know more about which items are charged at which VAT rate, then you can find a list by clicking this link.
You may notice some items have “exempt” next to them. This means VAT is never charged on them, not even at 0%.
We hope the above has given you a greater understanding of value added tax, but if you have any questions regarding the above, please do not hesitate to contact us.