Value Added Tax in the UK



I thought its was just a 20% tax on all purchases, but after watching a YouTube video on it, it seems more convoluted than that

In: Economics

You’ll need to be more specific with your question or at least link the video and explain what you don’t get about it.

VAT/sales tax In the UK is currently set in accordance with EU regulations.

VAT is a tax on the value added to a product or service. For the end consumer, you simply pay the VAT rate (so if the VAT rate is 20% and your product costs £2000, you pay £2400 of which £400 is VAT).

If you’re a seller, you can reduce how much of that VAT you need to pay by how much VAT you paid to create a product. If you buy £1000 worth of raw materials you’ll pay £1200, thus paying £200 VAT. If you then do something to this raw material (say you buy wood and make a table) and sell it for £2000 (£2400 with VAT), you’ll only need to pay £200 to the government, because £200 of the £400 that needs to be given to the tax department was given when you purchased your raw materials. You’ve “added” £1000 of value to the materials, so you as a seller only need to pay £200 in taxes because 20% of £1000 is £200. The remaining £200 was paid by the guy you bought your raw materials from.

Conceptually a VAT adds a tax to each level in the production process in which value is added to a product.

For example, if you are making a widget then a company would buy the raw materials and then make the widget (step 1), and then another company would package it (step 2), and then anothet company would distribute it (step 3) and then another company would sell it (step 4). Each step along the way would be taxed (ie the distributor would pay a tax on their purchase from the packager, etc). This is in contrast to how it is typically done in America where all tax burden is placed on the point of sale.

The idea is the spread the tax burden across the entire process which decreases the tax burden on consumers and makes pricing more predictable and consistent.