Value-Added Tax, short VAT, is a type of sales tax on services and goods that represents the value added to products between suppliers and purchasers in the chain. It is this that makes it different from ordinary sales taxes.
On ordinary sales taxes, the tax on goods or services is paid once – when the specific item is sold.
With value-added tax, every time items are sold from the manufacturer to wholesalers, from wholesalers to retailers, and from retailers to consumers – the tax is paid and collected.
In the end, however, the consumer carries the brunt since businesses along the supply chain will reclaim the value-added tax they pay from the government through the course of doing business.
All EU (European Union) countries are required by law to charge and collect VAT. It is worth noting that tax amounts will vary from one EU country to the other, and some, but not all the value-added tax goes to supporting the EC-; European Commission. Each EU country can decide which goods are Value Added Tax-able and which are tax exempt.
With Brexit looming there could be some changes. Read this article outlining Belgium VAT after Brexit.
Value-Added Tax in the United Kingdom
The value-added tax most of the taxable goods in the United Kingdom is 20 percent (as of 2011, the UK government can lower or raise the rate). Some items, like child car seats, are taxed a much lower rate of 5 percent. Some things like children’s clothing and books are VAT-free. It is worth noting that some items aren’t exempt but zero-rated. What does that mean? It means that the items aren’t currently being charged any tax in the UK but could be within the tax charging system of other European Union countries.
How Does One Know How Much VAT they’ve Paid?
As a consumer of goods or services, when you buy anything from your local retail shop or a consumer-targeted catalogue, the value-added tax is included in the listed price, and you will not be charged additional fee – that is the law.
Since value-added tax at 20 percent – or 5 percent for unique goods is already factored in, it is wise that you get your calculator and make some necessary calculations to get an idea how much of the listed price is tax and how much is the value of the service or good you just bought. Multiply the listed price by 0.1666, and the answer you get is the tax. So, let’s say you purchase an item worth £120, you’d be buying something worth 100 quid to which 20 quid in value-added tax has been added. The sum of 20 quid is 20 percent of 100 quid, but only 16.6 percent of the asking price, which is £120.
In some instances, especially for more expensive items, merchants may show the value added tax amount on till receipts as a courtesy. Do not worry, that is just for your information and does not represent any extra charges.
Which Goods Are Subject To VAT?
Almost all the services and goods you buy are subject to 20 percent VAT.
Some items, such as periodicals and books, medicine and food, children’s clothing are free of value-added tax while others are rated at 5 percent. Check Her Majesty’s Revenue and Customs for a comprehensive list of value-added tax rates.
Sadly, to simplify it, the government has geared the list towards businesses selling, buying, exporting and importing good. As a result, it is very confusing and a waste of time for ordinary consumers. The critical thing to remember is that most items in the market are taxed 20 percent VAT, you will probably be surprised when they aren’t. Besides, if you’re leaving the European Union after a trip to the United Kingdom, you can still reclaim the tax you paid.
That’s Interesting. But How Do I Get Refunds?
Finally, we are at the heart of the matter. Getting value-added tax refunds when you leave the United Kingdom for a destination outside the European Union isn’t that difficult, but be warned, it can be quite time-consuming. As such, it is only worth struggling over for things that you have spent a good sum on. Here is how to go about it:
Look for stores that display VAT Refund Scheme signs. The scheme is voluntary, and shops aren’t required to offer it. However, shops that are popular with visitors from overseas usually have the option.
Once you have paid for your services or goods, shops that run the scheme will provide you a Value Added Tax Retail Export Scheme sales invoice or a Value Added Tax 407 form.
Fill the form in the presence of the retailer and produce proof that you’re eligible for a refund – your passport should do.
At this point, your vendor will explain how the refund will be rewarded and what you need to do once the form’s been approved by customs.
Safely keep all the paperwork as you will need to present it to customs officials when leaving; especially if you’re carrying the goods with you but are visiting another European Union country before leaving.
When it’s time to leave the EU or the UK for home, outside the European Union, you will need to show customs official all your paperwork. Once they approve all of your forms, which is usually by stamping them, you can now arrange to collect your refund using the method you agreed with the vendor/retailer.
If customs officials aren’t present, there’ll be a box in which you can drop the forms. The officials will collect them and, once they’ve approved them, notify your retailer to sort out your refund.
It is worth noting that value-added tax is only reclaimable on items that you take out of the European Union. The value-added tax charged when you dine out or on your hotel stay isn’t – even if you decide to pack it in a doggy bag.
