How does VAT work now?
VAT stands for Value Added Tax. VAT is added to most goods and services that you purchase. The standard VAT rate is currently 20% which has been increased from 17.5% on 4th January 2011.
When you view prices of items in shops in the UK, you see the inclusive price where VAT has already been added.
|% of VAT||What the rate applies to|
|Standard Rate||20%||Majority of goods and services.|
|Reduced Rate||5%||Certain goods and serices, e.g. children’s car seats and home energy.|
|Zero Rate||0%||Zero-rated goods and services, e.g. most food and children’s clothing.|
How does VAT affect businesses?
- They may have to add VAT to the prices of their products
- They must send that extra VAT to HMRC
- As a business you can claim back any VAT on supplies that the business uses.
How does VAT work in practice?
Here is an example of how VAT works in real life. This example highlights how VAT is structured to be paid by the customer in the end, rather than the retailer itself.
In this example, glasses are created at the production cost of £40. The rate of VAT is 20% which totals the cost of the glasses to £48. The £8 (20%) VAT goes to HMRC. This is the cost that the retailer pays to production for the glasses.
The retailer then marks up the price to £100 to make a profit on the glasses. The rate of VAT is again 20% which totals the cost of the glasses to £120. The customer pays the total cost of £120 to the retailer for the glasses.
When the retailer is filing taxes to the government, they can claim back the £8 that they previously paid to production. This means that the retailer only pays £12 which is £20 – £8 = £12. From this you can see that the end VAT of £12 is laid out to be paid by the customer rather than the retailer.
How does import VAT work?
When you import goods from outside of the UK you most likely have to pay import VAT. The import VAT price is usually added when you pay customs. When submitting your VAT return you can typically claim it back.
Click here to learn more about import VAT directly from gov.uk.
How does export VAT work?
When sending, selling or transferring goods outside of the EU you usually will have to add export VAT. The rate of VAT will be dependent on what goods or services you are selling and to whom you are selling.
Click here to learn more about export VAT directly from gov.uk.
If you would like to know more, feel free to get in touch.