VAT (Value Added Tax) is a tax on consumption introduced by the UK government in 1973 and it is paid on most goods and services with different values on products and services such as alcohol, tobacco, fuel, gambling, insurance and flights. It is the third largest source of revenue for the government after the income tax and National Insurance, regulated primarily through the Value Added Act from 1994, administered and collected by HMRC (HM Revenue and Customs).
It is an indirect tax because it is not paid to the government by the buyer, who actually supports the value of the tax from his or her salary, but through the seller. It is also considered by some a regressive tax with the argument that the poorest people spend a higher proportion of their income on VAT than the richest people and by some a progressive tax because consumers who spend more pay more VAT.
VAT standard rate, which was increased on 4 January 2011 from the level of 17.5% to 20% is applied for most goods and services. The reduced rate of 5% is applied for some gods and services such as home energy and car seats for children. There are also zero-rated goods such as most food products and children’s clothing. Postage stamps, financial and property transactions and other things are exempt from VAT.
We pay the Value Added Tax on most of the goods and services provided by businesses registered in the UK and on some goods and services which are imported from outside the European Union.
Goods and services imported from within EU and associated VAT are under complex regulations such as a minimum of 15% set for the standard rate and a number of up to two reduced rates of at least 5% for a restricted list of goods and services, with the European Council approving any temporary reduction of VAT.