What is Value Added Tax?
VAT is a tax on consumer spending which affects everyone in the UK purchasing most goods and services
VAT is an indirect tax, which most consumers don’t even notice they are paying, unlike income tax which is a direct tax which is very evident on a payslip!!
There are currently three rates of VAT in the UK;
* Standard rate (20%)
* Reduced rate, eg on domestic fuel or power (5%)
* Zero rate, eg on most foods (0%)
There are also goods and services that are outside the scope of VAT (exempt), eg Health & dental care, and education & training.
How is VAT collected and paid to HMRC?
VAT is a tax which is paid by the final consumer of the goods. If a member of the public buys a TV for £840, and the VAT rate is 20%, the amount paid includes VAT of £140 (EG £700 + 20%). The buyer stands the cost of the VAT, but the VAT is actually paid to HMRC by all of the businesses involved in the manufacturing process as follows;
Sells materials for £200 plus £40 VAT = £240
Adds on margin and supplies the TV to a shop for £400 plus £80 VAT = £480
Adds on margin and sells the TV for £700 plus £140 VAT = £840
Buys the TV for £700 plus £140 VAT