Value Added Tax (VAT) is added to the price of most goods and services bought by consumers – in other countries it is often known as a sales or consumption tax.
VAT replaced the purchase tax in the UK when the country joined the EEC (now the EU) in 1973. The rate has fluctuated over the years, but it remained at 17.5% between 1991 and 2011, when the-then coalition government raised it to 20%.
What is VAT charged on?
Not all products incur VAT at the full rate, although most things do.
As mentioned above, VAT has in the past been seen as a tax on luxury items or things people could perhaps do without, although that distinction is being lost to some extent.
Some items incur VAT at a reduced rate of 5% including:
* Domestic gas and electricity.
* Energy-saving items such as solar panels.
* Children’s car seats.
As well as the reduced rate, there are a number of products on which no VAT is charged.
These include most food, children’s clothing, books and magazines, and goods sold in charity shops which have been donated by members of the public.
There are several quirks in the VAT system. For example, biscuits incur VAT at the full rate but cakes are exempt; and potato crisps incur 20% VAT but corn-based snacks are VAT-free.
Certain services are also zero-rated for VAT, such as gambling and bingo, sport, medical treatment, and insurance (although many types of policies incur insurance premium tax).
VAT on services
If you pay a company to carry out domestic work, such as decorating or plumbing, you will only have to pay VAT if the firm is registered for the tax.
Businesses whose annual turnover reaches a certain level must register for VAT, and others can register if they wish.
But this means that by using a non-VAT-registered smaller company or one-man band, you can avoid a 20% increase in your bill.
For more useful information, browse our money articles