What is it?
Value Added Tax (VAT) is a broadly based consumption tax added to goods and services. It applies to nearly all goods and services bought and sold for use or consumption in the European Union (EU).
How does it work?
VAT is a consumption tax that the final consumer pays. It works out as a percentage of the sale price. As the final price of the product is equal to the sum of the values added at each preceding stage, the final VAT paid is made up of the sum of the VAT paid at each stage.
Registered VAT traders have a number and show the VAT charged to customers on invoices. As such, if the customer is a registered trader, they can deduct in turn and the consumer knows how much tax he has paid on the final product. In this way the correct VAT is paid in stages and to a degree the system is self-policing.
Why do we need it?
When the European Community was created, the original six EU countries used different forms of indirect taxes, most of which were known as cascade taxes. These multi-stage taxes were so in-depth that it made it impossible to determine the real amount of tax on products and prices. There was always a risk that EU countries either accidentally or deliberately subsidised exports by overestimating the taxes refundable on exportation.
It became apparent that for an efficient, single market in Europe, a neutral and transparent turnover tax system was required.
With Brexit, there is discussion over whether the UK will continue to use the EU VAT laws, but currently it is too early to tell what will change.
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