You may have heard the term VAT but do you know what it means?
VAT, or Value Added Tax, is a tax on most goods and services provided by registered companies in the UK. Our government collects VAT from the seller (the business) rather than the customer even though it is the customer who ultimately pays the VAT.
The standard rate of VAT is currently 20%. This means if you buy a DVD that costs £10 then £2 of that money goes to the government as VAT. Although 20% is the standard rate there are many things that have a reduced rate of VAT, are Zero Rated or are exempt from VAT.
Here are a selection of items in each VAT bracket.
Standard VAT (20%)
Chocolate, electrical goods, ice cream, crisps, petrol, hot take-away food and stationary.
Reduced Rate VAT (5%)
Children's car seats, electricity, gas, heating oil and solid fuel (coal).
Zero Rate VAT (0%)
Cycle helmets, biscuits (not chocolate covered), books (not ebooks), cereals, eggs and milk.
Exempt from VAT
Antiques, TV licence, postage stamps, membership subscriptions and lottery tickets.
Wait I'm confused, what is the difference between Zero Rate VAT and VAT Exemption?
If a business sells goods that qualify for Zero Rate VAT the company themselves can recover VAT on their costs. This means they can expect a repayment each month from the government.
If exempt goods are sold no VAT can be reclaimed on any costs the company may have paid.
Things could be more confusing!
Although this might all seem hard work at least you know when you go into a shop that the DVD you want to buy is £10 because that is what it says on the price tag. There are some countries that charge tax but you have to work out for yourself how much it will cost.
For example, if you wanted to buy a DVD in Canada the price tag might say C$10 but at the till you would actually have to pay a 13% Goods and Services Tax (GST) so the final cost would be C$11 and 30 cents.
It is easy enough working out the tax on one item but can you imagine have a shopping basket full of things and having to work out if you have enough money?
