Value Added Tax

Value Added Tax

Basic, GCSE(F),

Value Added Tax, or VAT, is a sales tax added to the price of goods or services in the UK. VAT is also raised throughout the EU, with rates varying between countries. VAT is used by central government to raise money for services such as health, education, defence, pensions and benefits.

Some goods do not have VAT, such as food, clothes for children and books. Other goods - fuel, alcohol and tobacco - have additional taxes.

In Europe, prices shown at the point of sale have VAT included in the price: there is no additional amount to pay.

VAT is raised as a percentage amount of the original price of the goods. If a coat originally cost £100, then an additional 20% (the VAT rate) is added to make the purchase price £120.

Examples

1. A shop is selling shirts for £15 + VAT. If VAT is 20%, how much will the shirts cost each?

Answer: £18.00

10% is £1.50; and 20% is £3.00. Add this to the cost of the shirts = £18.00.

2. A washing machine costs £240.00. The price includes VAT. How much of the cost is the VAT?

Answer: £40.00

£240.00 is 120% (100% + 20% VAT)

Change the percentage to a multiplier (`frac(120)(100)` = 1.2).

Divide the sale price by the multiplier (240 ÷ 1.2) to obtain the original price = £200.

The VAT is the difference, or £40.