What is VAT and how does it work? (2024)

FAQs

What is VAT and how does it work? ›

A value-added tax (VAT) is paid at every stage of a product's production from the sale of the raw materials to its final purchase by a consumer. Each assessment is used to reimburse the previous buyer in the chain. So, the tax is ultimately paid by the consumer.

It's a sales tax paid by consumers (not businesses), and it doesn't exist in the United States. Only visitors—including U.S. tourists—are able to qualify for a VAT refund.

No, the United States has no VAT. The federal government raises money primarily through the income tax system. The states and local governments establish and collect their own sales taxes. Local governments rely primarily on property taxes.

Businesses must register for VAT whether they are incorporated or are sole traders, whether they pay corporation tax or not. Businesses with revenue below this threshold may also benefit from registering for VAT. VAT registration allows businesses to reclaim VAT on goods and services purchased by your business.

VAT (Value Added Tax) is a tax added to most products and services sold by VAT -registered businesses.

If customs taxes are due, your courier will contact you with information and costs, but you may also be charged VAT and/or excise duty as well. VAT is charged on most goods at the standard rate of 20%, but some goods may be eligible for a reduced rate at 5% or even zero-rated at 0%.

The United States is in the minority of countries that don't levy a value-added tax, though most states have a sales tax that serves the same purpose.

Claiming back VAT involves completing a VAT Return – usually each quarter. If completing the VAT Return form online on HMRC's website, you must enter how much VAT your business was charged in that three-month accounting period for goods and services you are able to claim VAT on. This is known as input VAT.

VAT disaggregation is one way of staying under the VAT registration threshold by effectively splitting your business up, so that the revenue of each part stays below the threshold.

What is VAT for dummies? ›

VAT stands for value added tax and it's a type of indirect tax. Indirect tax means that the payment of tax is passed onto another entity. So, let's say your business is VAT registered. You add VAT to your sales invoices and send them to your clients.

The vendor is required to pay the difference between the output tax and the input tax or claim a VAT refund where the input tax exceeds the output tax. VAT is therefore, charged at each stage of the production and distribution process and it is proportional to the price charged for the goods and services.

Key Takeaways. A value-added tax (VAT) is paid at every stage of a product's production from the sale of the raw materials to its final purchase by a consumer. Each assessment is used to reimburse the previous buyer in the chain. So, the tax is ultimately paid by the consumer.

A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer.

What can you reclaim VAT on? You can only reclaim VAT on goods and services that were exclusively used for your business. You can't reclaim VAT on goods and services that are for non-business use or are for client entertaining. You also can't claim for services that are exempt from VAT, such as insurance.

Generally, no refund of sales tax is available if you took possession of the item from the vendor with a given state. In the United States, sales tax is imposed at the point of transfer of title or possession.

You must show the invoice, the refund form, the goods and any other necessary documents to the customs officers of the last EU country you leave. The customs officers must stamp the form as proof of export. Without the stamp, you will not obtain the refund.