Value Added Tax, more commonly known as VAT, is paid at every stage of a product’s production from the sale of the raw materials to its final purchase by a consumer. Each assessment is used to reimburse the previous buyer in the chain. So, the tax is ultimately paid by the consumer.
VAT is commonly expressed as a percentage of the total cost of a good or service. For example, if a product costs £100 and there is a 15% VAT, the consumer pays £115 to the merchant. The merchant keeps £100 and remits £15 to the government.
The VAT system is used in 174 countries as of 2022 (latest information) and is most commonly used in European countries, however it is not used in the United States.
Consumers pay this tax on virtually “all goods and services that are bought and sold for use or consumption” The standard, minimum VAT rate in the EU is 15% while the reduced rate (added to certain goods and services) is at least 5%.
The standard VAT in the U.K. has been 20% since 2011. The rate is reduced to 5% on certain purchases such as children’s car seats and home energy. There is no VAT on some items like food and children’s clothing. Financial and property transactions also are exempt.