What is VAT?
What is VAT?

The following Tax guidance 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?

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. The UK left the EU on 31 January 2020, but the basic principles of VAT explained in this Practice Note do not change given that most of the rules have been