Value-added tax (often called by its initial letters "VAT" or “V.A.T.”) is the English name of a tax that is added to things sold in the European Union. It is like a sales tax that is charged in some US States.
The tax is paid every time goods are sold.
- The maker charges the wholesaler VAT and pays the tax to the government
- The wholesaler charges the shop VAT and pays the government the tax minus the tax it has already paid to the maker
- The shop charges the customer VAT and pays the government the tax minus the tax it has already paid to the wholesaler.
The tax can be complicated to work out, because every business or person has to charge the tax, and have an invoice to show they have paid some tax. The only person who pays the full amount of tax is the customer of the shop.
The government also charges VAT on some services. This is because some companies do not make a thing which can be used (goods) instead they do something to help a customer (that is, provide a service).
For example, a garage-owner might sell a spare part for a customer’s car. The garage-owner charges VAT because spare parts are “goods”. If the garage-owner helps the customer by fitting the spare parts into the car, the garage-owner would charge extra for his time, and would also charge VAT on the amount he charged for the service of fitting the parts.
VAT is not added to all products. Children's books and clothes do not have VAT.