VAT stands for Value Added Tax, and is an indirect tax that you pay when you buy goods and services here in the UK.

VAT is usually included in the price, so there is no need to add an extra amount to the price that is shown on the item when out you are shopping, as you would do in the United States, for example.

There are three different VAT rates that cover all goods and services, these are the Standard rate, the Reduced rate and the Zero rate.

17.5% - changing to 20% in 2011

The Standard rate is currently 17.5% and is found on most things that you buy, such as clothes and electrical goods, whilst it is also added to certain services, such as plumbing and having your car fixed. However, unlike buying in shops, you will find that most plumbers, builders and mechanics do not automatically add on the VAT when quoting a price, so make sure that you always check with them first before accepting their quote. The rate will increase to 20% in 2011.

5%

The reduced rate is set at 5% and is not quite as common as the standard rate; you are likely to find it on items that the government consider more important to your overall well-being, so you will find it added to things such as your electricity and gas bills, for your home, and children’s car seats.

Zero rate

The Zero rate is for goods that don’t have any Value Added Tax added to the original price. This is applied to essential items. You will find the Zero rate applied to food, books, children’s clothes, and newspapers and magazines.

VAT does not apply to certain services because the law says these are ‘exempt’ from VAT. These include loans of money, insurance, certain types of education and training and some property transactions (selling, leasing and letting land and buildings, but not garages, parking spaces, hotel or holiday accommodation).

Your business and VAT

If you are planning to set up your own business here in the UK then it is likely that you will charge your customers VAT, as it applies to most business transactions. You must register your business with the tax office, Her Majesty’s Revenue and Customs (HMRC) once your business passes the VAT registration threshold. This means once it starts earning more than a certain amount each year or the value of your taxable supplies in the next 30 days alone is expected to exceed this threshold. Since April 2010 the turnover threshold is at £70,000. (Turnover is the amount of money a business earns). If you don’t register for VAT you will probably be fined.

If you have any questions regarding VAT then the best thing to do is to contact the HMRC National Advice Service. You can call them direct on 0845 101 9000 between 8.00 am and 8.00 pm Monday – Friday, where they will be able to offer you any advice you may need. Alternatively you should speak with your Accountant.

By John Hillman

USEFUL WORDS

Value Added Tax (VAT)  = a tax added to the price of goods and services
producer = a person, company or country that grows or makes food, goods or materials
consumer = a person who buys goods or uses services
VAT-registered business / seller = a company / person which pays VAT
import / export = bringing goods into / taking goods out of a country
exempt from VAT = does not have to pay VAT
HM Revenue & Customs (HMRC) = the UK government body responsible for taxes
gross / net cost = the cost before / after tax has been taken

GRAMMAR SPOT

Fractions and Percentages

Use fractions (a quarter, two-thirds, half) with of before determiners and pronouns:

It takes a quarter of an hour
I only spent two-thirds of the money, so there’s a third of it left
I slept for half of the journey and read for the other half of it

Use half with or without of before determiners:

Half (of) my answers were wrong
Half (of) our business is exempt from VAT

Use percentages (5%, five per cent) with nouns, or with of before determiners and pronouns:

VAT in the UK is 17.5%
They take twenty per cent of my pay.  I get seventy per cent of it
(Percent is sometimes written as one word, especially in American English)

Fractions and percentages with singular or uncountable nouns have singular verbs.  With plural nouns they have plural verbs:

Two-thirds of the report is written
About twenty per cent of the students are from overseas