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 1994/5 tax year 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 VAT on fuel being fixed at 8%. This was reduced to 5% in 1997/8. 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 indirect tax on a variety of different products:
| Good | Duty (pence) | Total duty as % of price | Total tax as % of price |
|---|---|---|---|
| Cigarettes (20) | |||
| specific duty | 183 | ||
| ad valorem (22% of price) | 96 | 64.2% | 79.1% |
| Wine (75cl) | 116 | 35.9% | 50.8% |
| Spirits (70cl) | 548 | 44.8% | 59.7% |
| Beer (pint of bitter in pub) | 26 | 14.4% | 29.3% |
| Petrol (Lead Replacement - litre) | 51 | 64.8% | 79.7% |
| Unleaded Petrol (litre) | 49 | 64.2% | 79.1% |
| Diesel (litre) | 49 | 63.2% | 78.1% |
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?