UK Accounting Glossary
Value Added Tax (VAT) is a charge on the taxable supplies of goods and services made in the UK by a taxable person in the course or furtherance of a business.
Where appropriate, a trader adds VAT to sales and must account to HMRC for the output tax.
The input tax paid on purchases can be deducted from the output tax due.
VAT, indirect taxation that falls on the final customer, was introduced in 1973 when the UK joined the European Economic Community (ECC).
Unless they are zero-rated goods and services, exempt supplies or special rates goods, all goods and services in the UK are currently taxed at a rate of 20%.
A value-added tax is sometimes referred to as VAT. A value-added tax is added to the price of a product at each stage of its manufacture or distribution. As more “value” is added to a product, value-added tax, based on a percentage of the increased value, is paid. For example, a log would be subject to value-added tax based on the price paid by the lumber mill. Finished lumber made from the wood has the value-added tax applied based on the added cost of milling. A table fabricated from that lumber would have more added value and another percentage of value-added tax. The difference between the cost of the lumber and the table would be subject to the value-added tax. The value-added tax might be applied to services such as a doctor’s fee. Value-added tax could also be paid on the electricity distributed by a utility company. Ultimately, a value-added tax is a sales tax that is paid by the end consumer of the good or service.
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This glossary post was last updated: 4th May 2019.