What Is Value Added Tax (VAT)?

Value added tax, or VAT, is a consumption tax used in the United Kingdom, the European Union and many other countries. It is charged on the value added at each stage of production and sale. Businesses charge VAT on what they sell and reclaim the VAT they paid on what they buy, so the tax ends up falling on the final customer.

How it works

A registered business adds VAT to its prices, records it and files regular returns. It pays the tax authority the difference between the VAT it charged and the VAT it paid on business purchases. Rates differ by country and by type of product, and some goods and services are reduced-rated, zero-rated or exempt.

Registration

Countries set thresholds for when a business must register. The UK government's page states a registration threshold of £90,000 of taxable turnover, and says overseas sellers supplying goods or services to the UK must register regardless of turnover in most cases. Other countries set their own limits, and some have none. Check each tax authority for current figures.

Cross-border and digital sales

Selling to consumers in other countries can create VAT duties there, and for digital goods the buyer's location often decides which VAT applies. Schemes exist in some regions to report several countries through one return. Check the rules of each place you sell to.

An example

A UK seller whose turnover passes the threshold registers, adds VAT to prices, files returns and reclaims the VAT paid on business purchases.

Related terms

See sales tax, sales tax nexus and payment processor. For a wider overview, read our guide to sales tax and VAT for online sellers.