How To

What is VAT and How do we Calculate it?

In the majority of countries worldwide a certain sum of money, depending on the countries individual predetermined percentage, is taken up as a consumption tax from both purchased goodies and services. If you are a foreign citizen in countries like Europe, Japan or Australia you are entitled to refund that sum of money upon leaving the country you’ve made the purchase in.

What is VAT?

VAT an abbreviation for Value Added Tax, stands for the sum levied on goods and services, found in VAT-registered businesses in most countries in the world. Also, VAT is charged for whenever goods or services are imported/exported from one country to another.

Who charges VAT and when is VAT charged on?

VAT is charged not only among VAT registered businesses exchanging goods or services but also among a business and individual customers. For example, VAT is charged in all of the following cases:

  • Shoe makers add VAT to the price of their product sold in retail afterwards in a shoe shop (business – business)
  • Barbers charge VAT within their price to all of their individual customers (business – nonbusiness related individual)

As mentioned earlier you are entitled to VAT refund as a registered business yet only if you are VAT registered; otherwise all the goods and services purchased will go without refund.

To be a VAT registered business means that you are entitled to:

  • Charge VAT for the services/items you sell
  • Reclaim VAT when you purchase materials needed for the completion of services/items you provide.

What are the rates of VAT?

Rates of VAT depend exclusively on the country they are applied in. If we take UK as an example you have three main types of VAT rates on different purchased goodies or services.

1.       Standard Rate (20% of the price)

Applies to all of the purchased goodies or service if not stated otherwise.

2.       Reduced Rate (5% of the price)

Applies to some services such as power, utilities, energy and energy saving, heating ect.

3.       Zero Rate (0% of the price)

Food is normally zero rate except for the meals purchased outside like restaurants for example. Also, items such as alcoholic beverages, snacks, and other processed foods belong in the standard rate scope.

There are however services as well as goodies that are exempt from VAT meaning that no VAT is charged upon their purchase as well as services and goodies that are entirely off the VAT scope.

Which items are exempt from VAT?

Exempt from what means purchasing services or goodies which are VAT non-refundable. Such VAT exempt items are for example,

  • Education, vocational training and services provided by a school, college or university
  • Physical education and sports activities
  • Betting and gaming
  • Bingo
  • Admission charges such as visits to museums, art exhibitions, zoos and performances
  • Antiques, works of art or similar
  • Charitable fundraising events
  • Burial or cremation of dead people, or burial at sea
  • Care or medical treatment
  • Health services provided by registered doctors, dentists, opticians, pharmacists and other health professionals
  • Financial services and investments
  • Insurance

Is there anything outside the scope of VAT?

Sure. Items that are outside the scope of VAT include:

  • non-business activities like a hobby
  • fees that are fixed by law

How do you calculate VAT?

In order to calculate VAT you have to have all the parameters in order the rest is simple math. Once you make sure in which group does the item/service belong in, whether it is standard rate or reduced rate and you have it clear if you will be adding the sum of VAT or subtracting it from the price, voila you’ve got it right the first time.

Nowadays there are online VAT Calculators like this one that are designed to do the job for you as long as you adapt the parameters, give in the sum and press enter. It is so very simple, and reachable as it is an app that can be downloaded on your phone which you carry out everywhere in your pocket. So, calculating VAT has never been easier, especially for those that deal with such a matter on daily basis.