What is VAT: A guide for shoppers

Ever made a purchase and wondered why there’s additional tax added to the final price? VAT is commonly added to shopping receipts in the UK, yet many may not know what it is and how it works.

This article includes tips, suggestions and general information. We recommend that you always do your own research and consider getting independent tax, financial and legal advice before making any important decision.

Learn the basics of VAT in this guide.

What does VAT stand for?

Value Added Tax — more commonly known as VAT — is a consumption tax that may be charged to goods and services sold in the UK and elsewhere. It’s typically applied whenever value is added to a given product between the point of production and the point of sale.

It’s important for individuals to be aware of VAT as the tax can affect the end price of goods and services. Learn more finance terminology.

How does VAT work and when is it charged?

VAT exists to generate tax revenues. Businesses and suppliers registered for VAT are required to charge consumers VAT on every product or service they provide. They report this amount to the HM Revenue & Customs, which collects it on behalf of the government.

Here are a few examples of taxable areas. Keep in mind this is not an exhaustive list.

• Food and drink
• Power and utilities
• Clothing and footwear
• Travel and vehicles
• Sport and leisure

On the other hand, VAT-exempt goods and services may include financial services, education and training, charity events, and healthcare. Check with local government organisations for a current list of VAT-taxable and VAT-exempt goods and services.

Understanding VAT Rates

VAT is applied to goods and services at three different rates in the UK: standard, reduced, and zero.

• What is the standard VAT rate? The standard VAT rate is 20% and generally applies to most goods and services.
• What is the reduced VAT rate? The reduced VAT rate is 5% and may apply to some items like fuel, heating, and health products.
• What is the zero rate VAT? The zero rate VAT is 0%. It may apply to some books, clothes, and food. It usually must be reported even if no VAT is charged to the consumer.

Explore current VAT rates and more information.

How does VAT affect consumers?

VAT impacts individuals’ day-to-day expenditure by increasing the final price of goods and services. However, the amount of VAT paid on a given item depends on what it is and the rate that applies to it.

For example, if someone purchases a new car, they may pay VAT at the standard rate — which would be 20% of the total price. This means that for every £100 that the car is worth, £20 in VAT will be added.

How can consumers save on VAT?

Here are a few potential ways people may save on VAT:

• Purchase goods and services that are zero rated or VAT exempt.
• Shop for the best prices.
• Make large purchases during sales periods.
• Seek out discounts and special offers.
• Pay with a cashback credit card.

Get more practical tips to save money when shopping.

Stay informed on tax and other financial matters

VAT is an indirect consumption tax that applies to many goods and services purchased in the UK. Though it can be confusing, understanding how VAT works can help individuals shop smart. Explore more strategies for managing finances.