Do You Ever Think of How VAT Affects the Prices You Pay?

28 March 2014, 12:39

Most of us are aware the standard rate of VAT at present is 20%. This means that most goods and services you buy have 20% VAT added into the price. If you buy something for £100, 20% of that amount – £20 – is taken for VAT. As the buyer you don’t have to worry about this as the sum is paid by the business to the government. However it still affects the price you pay.

Or does it? There is more to this story than meets the eye. For instance what would happen if VAT was suddenly abolished? This isn’t likely to happen but it is interesting to consider the idea. One of two things would happen in this instance. Businesses would keep their prices the same and enjoy a rise in profits, or they would get rid of the VAT portion, keep their profits the same and give everyone a significant discount in the process.

As you can see VAT does affect you directly even if you don’t think it does. You’ve probably picked up a catalogue or two in the past that shows prices in large type without VAT, including VAT in the smaller printed price underneath. You get an initial surge of excitement when you see the big price, only to realise it isn’t actually as exciting as you might think. This is how VAT can be used by businesses to make their prices look good to get your interest, before showing you how much you would have to pay with VAT included.

To be fair, most of the businesses that do this appeal to other business audiences as well as to regular people. Since many businesses would be able to claim back the VAT paid on goods they buy for their business, they would pay the price in larger type. But it does make you think, doesn’t it?

When the price of VAT changes in any way, the change affects us all. It may not affect you as much as other people, but it will have an effect. If the basic rate went up to, say, 25% tomorrow, you would end up paying more for many goods and services you need. This is because every business that has to add VAT to its products and services will add on that extra 5%. You will then be left with more to pay, which can be frustrating when you are trying to stick to a budget.

So the next time you go out and buy anything, consider how much of the purchase price is down to VAT. You’ll soon start to realise just how much this tax does affect you – even if you think it doesn’t affect your life at all.