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Value Added Tax

Value Added Tax

Value Added Tax, or VAT, is a sales tax added to the price of goods or services in the UK and Europe.

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

In the UK and 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 is put on sale at £100, then an additional 20% (the VAT rate) is added to make the purchase price £120.

Example 1

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

`frac(20)(100) x £15.00 = £3.00`

Add this to the cost of the shirts = £18.00.

Answer: £18.00

Example 2

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

This is a reverse percentage.

£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.

Answer: £40.00

See also Percentages Greater than 100% and Reverse Percentage