Value added tax (VAT) is a type of tax you pay when you buy goods and services in the EU, including the UK. When you pay tax you usually don’t realise you are actually paying it as it is usually included in the price you see on the label of the product.

The Rate of VAT

In the UK there are 3 types of Value Added Tax:

• Standard rate – This is 20%
• Reduced rate – This is 5%
• Zero rate – This is 0%

Most items are standard rate unless they state otherwise. Reduced rate applies to items such as domestic power and fuel, hygiene products, children’s car seats and installation of energy-saving materials. Zero-rate applies to certain items such as food, newspapers, shoes, children’s clothing and public transport. There are certain things which are exempt from Value Added Tax such as proving credit, insurance, fund-raising events by charities and education.

The Advantages of VAT

There are many advantages of VAT including:

• Compared to other taxes, there is less chance of tax evasion. Value Added Tax minimises tax evasion due to its catch-up effect.
• Value Added Tax is simple to administer.
• Value Added Tax is transparent and has minimum burden to consumers this is because it is collected in small fragments at various stages of production and distribution.
• Value Added Tax is based on value added not on total price. So, price does not increase as a result of Value Added Tax.
• There is mass participation of taxpayers.

The Disadvantages of VAT

• Value Added Tax can be costly to implement as it is based on full billing system.
• Value Added Tax is relatively complex to understand. The calculation of value added in every stage is not an easy task.
• To be able to implement the Value Added Tax successfully, customers, need to be conscious, otherwise tax evasion can be widespread.

VAT Returns

Submitting a Value Added Tax Return to HM Revenue and Customs (HMRC) should be done every 3 months, this period of time is known as your ‘accounting period.’

The Value Added Tax Return records things for the accounting period like:

• Your total sales and purchases
• The amount of VAT you owe
• The amount of VAT you can reclaim
• The amount of VAT refund from HMRC

How Do VAT & Tax Differ?

Both Tax and Value Added Tax are consumer taxes, meaning that they have to be paid whenever someone purchases a product that is meant to be consumed or used. Tax is a type of direct tax, however, Value Added Tax is an indirect tax. This means that sales tax is directly applicable and is directly calculated on the selling price, whereas Value Added Tax is calculated indirectly on every stage of manufacturing.