What is VAT?

The following Tax practice note provides comprehensive and up to date legal information covering:

  • What is VAT?
  • Where does VAT come from?
  • What is VAT a tax on?
  • How is VAT collected?
  • How is the percentage rate of VAT applied?
  • How does the burden of VAT fall on the final consumer?
  • Who is really paying VAT?
  • Does everyone have to charge VAT?

What is VAT?

It is common knowledge that value added tax (VAT) is a tax which increases the price of goods and services that consumers in the UK buy. For a tax lawyer, before going into the detail of when it applies and how it is administered, it is important to understand more about what it is doing.

Where does VAT come from?

There are many different types of value added or sales taxes around the world. The UK VAT system is derived from the European Union (EU).

The EU common system for VAT is set out in Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (the VAT Directive). It is a common system because it requires member states of the EU to bring in laws which implement the system. However there are a number of areas within the VAT system where member states have choice as to whether and how to implement the system. The most significant of those choices is on the rate of VAT.

The VAT Directive was brought into UK law by the Value Added Tax Act 1994 and associated regulations and orders. For further details of the origins of VAT, see Practice Note: VAT- European legal principles.

The UK ceased to be an EU Member State on 31 January 2020. On this date, the UK entered an implementation

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