What Is VAT?

VAT Calculator

Some people are more affected by it than others, and if you own a business you will certainly have to pay more consideration to VAT.

But Value Added Tax, to give it its full name, is sometimes hard to understand, and that is where this article can help. If you don’t own a business then you may not think about it too much at all, but it helps to understand what proportion of the price you pay for something is allocated to VAT.

So let’s find out more.

So what exactly is it?

It is a tax that is added on to the price of items that you buy. So for example if you buy something that is £4.99, a proportion of that price will be VAT.

Until very recently the percentage of VAT when it applied was 17.5%. But as of 1st December 2008 the government decided to reduce this rate to 15%. The idea behind this was to encourage people to go out and spend more money, because the economy is struggling and many people don’t want to spend at the moment.

So now, if the net value of the item is £3.50 for example, you would pay £4.02 for it, instead of £4.11. It may not seem like much of a change, but over the course of many payments you would notice a difference.

As is obvious from the recent change, the amount of VAT charged can be varied at any time. This usually happens in the Budget, but it can happen at any time – such as in the unusual circumstances which occurred recently.

The VAT rate has now returned back to 17.5% from 2010.

VAT Calculator

 
       
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Does it apply to everything?

Most goods are covered by VAT, but not all of them are. For example, two of the most well known exemptions from the VAT system are books and children’s clothes. For these items the price you see does not include any VAT at all.

There is also another section of the system which is applied to certain items which have a reduced rate applied to them. At the moment this reduced rate is set at 5%, and this was not affected by the recent change in VAT that was widely announced by the government.

One example of an item on which you would pay 5% instead of the current 15% VAT would be a child’s car seat. However since we see only the sales price on the shelf or ticket, we don’t actually become that aware of how much VAT we are paying, since it is incorporated within that price.

VAT – who does it benefit?

Well the government certainly does, as it collects the VAT that is due on items from those businesses that are eligible to pay it.

But some businesses also benefit from the tax. At present you don’t need to register as a business unless you are earning £67,000 a year or more. But you can apply to register your business before this point – and it can pay you to do so.

For example, let’s suppose that you are just starting out in business. The chances are good that you will have equipment to buy, as well as stock (if you are selling actual items that you are buying from wholesalers).

The prices of the stock items will be given to you minus the value added tax. So if you see an item for £1.27 for example, you will actually have to pay £1.46 for it including the VAT. Now if you are not registered for VAT you will need to pay that amount of tax to the wholesaler. But if you are registered, then you can pay just the net amount. That will save you a lot of money in the end.

But of course it isn’t as simple as that. If you are registered then you will need to charge VAT on everything you sell. One amount is then taken away from the other and you must pay the government the difference.

For some businesses, this amount is quite small once everything has been worked out. And in some cases it may even be that the government actually owes you money! Although of course it is usually the other way around.

In conclusion

Different people have different opinions about value added tax. At the end of the day, if you don’t have a business yourself you may not be too bothered about it, but you are still paying more for your goods and services than you would be if VAT did not exist.

And it is certainly the case that for those businesses who do earn over £67,000 a year (or who register below this amount anyway), VAT can be a thorn in their side which ends up costing them more time and money. The amount of paperwork and extra work involved in figuring out the amounts owed can be quite significant.

But as with all taxes if it affects you and you need to pay it, you don’t have a lot of choice in the matter. So it pays to find out as much as you can about it, and get the right advice if you can.