VAT is a tax collected by the Government. It belongs to a set of taxes called 'indirect taxes': it is a tax added to goods or services.

VAT is charged on the supply of goods and services in the UK and on the import of goods and certain services into the UK.

Currently there are three different rates for VAT:

• 17.5% - this is the VAT rate added to most goods and services

• 5% - this is a reduced VAT rate which is put on fuel and power used in the home (you can take a look at the electricity bill and you will find out that there is only 5% charged) and by charities

• 0% - there isn't any VAT on most food, books, newspapers and young children's clothing.

So most of the time when you buy goods or services, you pay the VAT. It is already included in the price when you buy things.

Example:
You are buying some clothes - two pairs of socks, a t-shirt and some trousers. In total you pay £49.98. Included in the price is 17.5% VAT.

Businesses are able to reclaim most of the VAT on goods and services for use by the business. The VAT is usually reclaimed quarterly by completing a VAT return form and returning it to Customs & Excise. Any VAT due from invoices is also paid at the same time.