VAT – Value Added Tax – is a tax charged by businesses who are VAT registered with HMRC. VAT registered businesses have to charge VAT on all applicable goods and services they supply. Some goods and services are exempt or outside the scope of VAT.
Different goods and services have different VAT rates applicable to them. Currently, in the UK, the standard rate of VAT on most goods and services is 20%.
A simple business example:
- A VAT registered business sells computers in a shop on the high street charges and 20% VAT on all goods and services sold in the shop.
- The retailer purchases a computer for £400.00 + VAT from the wholesaler.
- Therefore, the retailer pays the wholesaler a total of £480.00 (£400.oo +£80.00, 20% VAT)
- The retailer sells the computer for £500.00 + VAT, so for a total of £600.00 including VAT (£500.00 + £100.00, 20% VAT)
- The consumer pays £600.00 for the computer, which includes £100.00 VAT.
- The retailer has paid £80.00 in VAT to the wholesaler and received £100.00 VAT from the consumer, so the retailer has to pay HMRC £20.00, which is the difference of the VAT paid (output tax) and the VAT received (input tax).
- The consumer pays £100.00 VAT and the consumer cannot reclaim this tax.
- However, if the consumer is a VAT registered business who will use the computer for the running of the business, then the VAT of £100.0 can be claimed back.
- In general, a normal member of the public cannot reclaim the VAT.
Therefore, VAT (Value Added Tax) is just another tax (an indirect tax) on the general public.
Introduction to VAT (HMRC link)