Value Added Tax - VAT

(The weekly series - Pocket Money - where I explain financial basics in fewer than 200 words. Feel free to make suggestions!)

Is a tax added to most goods and services sold in the UK (and other countries, it’s called MOMS in Sweden).

If the product or service is VATable, then VAT is charged at each stage of the production and distribution, but it’s claimed back by businesses which are VAT registered - meaning the only people that pay it are the end consumers. Smaller businesses may not need to be VAT registered and so they would be the end consumer.

Before my shop was VAT registered, I paid my supplier invoices which had VAT included. Done. When I became VAT registered I had to charge my customers VAT but from that total, I took off all the VAT I’d paid to suppliers, and paid the remainder to HMRC.

So, businesses actually collect the tax for the government. 

The standard rate in the UK is 20% but there are reduced rates:

• 5% - e.g. domestic fuel, children’s car seats,

• zero-rated (0%) - e.g. basic food and drink - including Jaffa Cakes and books,

• exempt (0%) - e.g. healthcare from registered professionals and insurance.

Businesses can claim back the VAT they’ve paid on zero-rated products but they can’t from exempt products.

Love Eleanor. xxx