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;

Manufacture & sale of a TV
VAT payments to HMRC
Sells materials for £200 plus £40 VAT = £240
Supplier keeps £200 and pays £40 to HMRC
Adds on margin and supplies the TV to a shop for £400 plus £80 VAT = £480
Manufacturer keeps £400 and pays £40 to HMRC (The difference between £80 collected, and £40 paid to the supplier of materials
Adds on margin and sells the TV for £700 plus £140 VAT = £840
Shop keeps £700 and pays £60 to HMRC (The difference between £140 collected and £80 paid to the Manufacturer
Buys the TV for £700 plus £140 VAT
Pays nothing directly to HMRC (£140 VAT has all been paid to the shop)

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