Read Our Guide on the Overview of VAT in the UK!
Value-Added Tax, also known as goods and services tax (GST) in some countries, are taxes that are levied on products at each stage of their production when value is added. VAT is oftentimes compared to sales tax. If you are curious to know how VAT works in the UK and the difference between VAT and sales tax, keep reading our guide to the overview of VAT in the UK below.
How Does VAT Work?
From the raw materials to the early production stage all the way to the final result, VAT is levied each time the product undergoes changes and gains more value. The seller charges VAT to the buyers and then pays the VAT to the government. However, if the buyer is not an end-user, meaning that they are buying raw materials to make a product, they can charge VAT when selling the final product to the buyer. The tax from each purchase is used to reimburse the seller and ultimately be paid by the end-user. VAT is also expressed in the form of a certain percentage of the total cost. For example, if a device costs £100 and is charged a 10% VA, the device will be sold for £110. Here, the £100 goes to the seller, and the £10 goes to the government.
What Is the Difference Between VAT and Sales Tax?
The main difference between VAT and sales tax lies in the supply chain. Sales tax necessitates one to pay the tax at the end of the supply chain – this means that the end-user or buyer will pay the tax to the seller. An example would be paying sales tax to the retailer after buying clothes. VAT, on the other hand, charges tax along the supply chain. Every time the product or service gains additional value and is sold to another supplier, retailer or distributor, VAT is collected by the seller. Unlike sales tax, the VAT regime does not only tax the purchaser at the end of the point of sale; rather, it is collected throughout the process.
VAT in the UK
Since 2011, the standard rate of VAT in the UK has been set to 20% for most goods and services. This rate, however, does not apply to the following:
- Energy-saving measures.
- Sanitary products.
- Children’s car seat.
Instead, these products or serviced are taxed at 5%. Several other children-related products such as children food and clothes are taxed at 0% (zero-rated supply). Zero-rated supply is not synonymous with tax exemption; zero-rated supply refers to taxable products and services, but the percentage of tax on these products is 0%. Therefore, the sale and purchase of the zero-rated supply products and services need to be accounted for by VAT taxpayers and must be recorded in their VAT returns as well. Also, do note that properties and financial transactions are exempted from VAT – these transactions do not have to be recorded or reported.