Value added tax (VAT) is a consumption tax. It is different from a sales tax, which is only added at the point of interest. VAT is estimated on the market value added to the product at each stage of manufacture and distribution.
How VAT is Determined
VAT is added to an item at every stage of production as well as at the final stage. The buyer of the product pays VAT on the cost of the product minus the VAT that has already been paid for the materials of that product. For example, a computer manufacturer has already paid VAT on the materials used to make the computer, so the consumer buying the computer would only pay VAT on any parts of the computer that have not already been subject to VAT.
VAT is used mainly in European countries, but even within the EU, the rate varies from country to country. The Canary Islands have one of the lowest rates of VAT at only 5 per cent, as of 2010, while countries such as Sweden, Hungary and Denmark have a 25 per cent tax rate.
The VAT in the UK went up to 17.5 in 2010 and rises to 20 per cent as of January 4, 2011.
How To Calculate VAT
Many stores already include the VAT in their price of goods. If your item does not include VAT, you can calculate the final cost. In the UK, you would add 17.5 per cent (or multiply by 1.175) to the cost of the item you purchase. An item that originally costs £65 would cost £76.3 with VAT.
If your item already includes VAT and you would like to know how much the net cost is, you would divide it by 1.175 or the rate of VAT you are paying in your company. For example, an item that costs £76 with VAT has a net cost of £65.
Not all products are subject to the same VAT rate. In the UK, basic food products are not subject to VAT. Some items are also given a special VAT tax rate. In Cyprus, taxi and bus fares are taxed at a special rate of 8 per cent, whereas other products and services are taxed at 15 per cent.