It’s likely that you’ve heard of VAT. An acronym for Value Added Tax, VAT affects many of us on a day-to-day basis. But what is VAT? What’s the VAT rate? And what happens to the money collected?
If you’re a consumer and wondering about VAT, our guide tells you everything you need to know.
What is VAT?
VAT is a form of consumption tax that’s applied to goods and services. In the UK, VAT was first introduced in 1973 and is consistent with the same VAT system operating within the European Union. It is added to taxes in the UK at a standard rate of 20%.
Most goods and services are subject to the standard 20% VAT rate. However, there are some exceptions. Items like children’s car seats and mobility aids are charged a Reduced rate of 5%. Then, there is a 0% rate, which applies to items like children’s clothes, books and newspapers. And things like insurance, education, antiques and art are exempt altogether. VAT is designed to be paid by the consumer.
Who charges VAT?
Any business that has a taxable turnover exceeding £85,000 has a legal obligation to register for VAT with HM Revenue & Customs (HMRC). Companies that make less than this figure do not need to charge VAT or register with HMRC.
Once a company is VAT registered, they are issued with a VAT registration certificate and a unique VAT registration number. You can check whether a company is VAT registered by using this Gov.uk link.
What happens to VAT?
When you pay VAT, the amount is collected by the company and paid to HM Revenue & Customs. This is done via a VAT return indicating the total VAT they’ve collected and paid out within the tax year or quarter. After filing the return, the company then pays any money owed directly to HMRC.
VAT, plus other taxes on consumer spending, make up the second-biggest revenue source for the government. It goes towards public services like healthcare, education and defence, as well as government grants and administration.
Don’t forget to sign up to TransferGo for easy, fast and affordable money transfers to Europe, Africa, Asia and beyond.