VAT, or value added tax, is charged as a percentage of the sale price on the majority of products and services provided by businesses in European Union (EU) member states. The rates and specifics of the system vary from country to country. In the United Kingdom, it is tiered--as of 2010, three rates are applied to different types of products and services. A further classification of "VAT-exempt" exists. VAT rates and the rules that relate change frequently, and it is important to consult the latest documentation.
The standard rate of VAT is the highest percentage charged and the one that comes as the biggest surprise to a shopper who is not expecting it. This rate is applied to most products and services. The VAT system is "cross-border," meaning that a U.K.-based customer buying from a German supplier will pay the German rate of VAT applicable at the time, for example.
The reduced rate of VAT is charged on some non-luxury items, the most popular being domestic heating fuel and car safety seats for children. For businesses, the fine print of the reduced rate legislation can be complicated and often applies only in certain specific circumstances.
The items on which no VAT is payable--called zero rated--might be considered essentials, although there are anomalies. Food and drink for human consumption is zero rated, but cooked takeout meals and alcohol are not. Books, magazines and newspapers are effectively free of VAT, as is clothing for children under age 14. The system gets very confusing when a child requires larger clothing or a small adult can wear youth sizes. It is important to note that zero-rated is not the same as exempt. In the former, a receipt will show that VAT is charged, but at zero per cent.
Products and services on which no VAT is charged are known as exempt. Examples of these include some financial services, such as insurance and credit services, training, education and charity fund-raising and the sale or leasing of commercial property and land.