VAT - Explanation

VAT (value added tax) is a tax on spending and is therefore known as an indirect tax. In the UK it is currently levied at 17.5% on most purchases. There are, however, a variety of goods that are zero-rated for VAT, including most food, newspapers and children's clothes. VAT on these is therefore zero! It also used to be that fuel (electricity etc.) was zero-rated for VAT but this was ended in the mid-1990s when the Conservative government of the time took away its zero-rating. However, a threatened revolt in the House of Commons resulted in the rate of fuel being fixed at 8%. The rate on everything else, however, is 17.5%.

As a tax on expenditure, the burden of VAT is intended to fall just on consumers. However, it is paid on all transactions by all VAT-registered firms, so how can this be? The way it works is that the firm pays VAT on all the goods and materials it buys and it also charges VAT on all the goods it sells. At the end of each month or quarter, the firm then works out all the VAT it has paid out to its suppliers and all the VAT it has received from its customers. The difference is paid over to HM Customs and Excise who administer VAT in the UK. The firm has therefore not paid any VAT itself; it is just the customers who have paid it.

The table below shows the amount of tax on a variety of different products:

(all figures in pence)	price	duty	vat	total	tax as % price
Cigarettes (20)	336	214.7	50	264.7	78.8
Wine (75cl)	305	108.5	45.4	153.9	50.5
Whisky (70cl)	1149	547.7	171.1	718.8	62.6
Beer (pint of bitter in pub)	166	24.7	24.7	49.4	29.8
Petrol (ltr 4 star unleaded)	69.0	45.1	10.3	55.4	80.2

Why not also have a look at the relevant theories about VAT and other indirect taxes, or have a go at some worksheets about it?