In a nutshell
VAT (Value Added Tax) is a consumer tax that the UK government adds for goods and services consumed in the UK. VAT is an essential source of income for the UK government and helps fund public services.
At the time of writing, the VAT rate is 20%, which means that for every £1 you spend, you have to pay an additional 20p as VAT. So if you buy something for £100, the VAT would be £20.
In practice, businesses add the 20% VAT rate to their goods or services and they are the ones responsible for collecting VAT and giving it to the government. For example, if you bought an item for £4.99 and you requested an invoice from the seller, you’d see something like this on the invoice:
This means that although you paid £4.99 to the seller, the seller only keeps £4.16 of that amount. They give the remaining £0.83 (20%) to the UK government.
Why would a company give the VAT to the government?
A company can claim tax credits by reporting the VAT to the government. When it comes time to file for corporation tax, the more VAT a company can show that it paid, the less tax it’ll have to pay.
- The more goods and services consumed in the UK, the more VAT the UK government earns.
- The UK government can enforce different VAT rates for different goods or services. This enables them to reduce the VAT rate on certain goods (e.g., vegetables 😂) to promote them or to increase the VAT rate on other goods (e.g., cigarettes) to discourage them.
- If you’re VAT registered, you can claim VAT back. But you also have to charge VAT for everything you sell. Thus, it makes you 20% more expensive.
- If your turnover is over £85,000 in a year, do you need to register for VAT?