Value Added Tax (VAT) is a consumption tax levied on the sale of goods and services. It is an indirect tax, meaning it is collected by businesses on behalf of the government and ultimately paid by consumers. VAT is applied at each stage of the production and distribution process, where value is added. This includes manufacturing, wholesale, and retail.
Businesses charge VAT on their sales (output tax) and can reclaim VAT on their purchases (input tax). The difference between the output tax and input tax is the amount payable to or refundable from the tax authorities. VAT rates vary by country and can include standard rates, reduced rates for certain goods and services, and zero rates for essential items like food and children's clothing.
The standard VAT rate in the United Kingdom is 20%. This standard rate applies to most goods and services sold within the UK, including non-essential items and services. There are, however, reduced rates of VAT for certain goods and services.
A reduced VAT rate of 5%, known as the "reduced rate", applies to specific items such as children's car seats, home energy supplies, and some energy-saving materials. Additionally, certain goods and services are zero-rated, meaning they are taxable but the rate is 0%, including most food items, children's clothing, books, and newspapers.
Some items and services are also exempt from VAT altogether, such as insurance, financial services, and education.
Businesses in the UK are required to register for VAT if their taxable turnover exceeds a specific VAT threshold, which as of 2024, is £90,000. Once registered, businesses must charge VAT on their sales and can reclaim VAT on their purchases.
VAT registration thresholds are decided by HMRC, it's important for each VAT-registered business to stay informed and up-to-date.
