What is "value-added tax"

n. (alternative form of value added tax English)

n. a tax levied on the difference between a commodity's price before taxes and its cost of production [syn: VAT, ad valorem tax]

' A value-added tax (VAT) or goods and services tax (GST) is a popular way of implementing a consumption tax in Europe, Japan, and many other countries. All OECD countries except the United States have a value-added tax. It differs from the sales tax in that taxes are applied to the difference between the seller-purchased price and the resale price. This is accomplished by taking full tax on all sales, but refunding the tax difference to the sellers.

The VAT is an alternative to a sales tax and is meant to deal with a specific problem. With a sales tax, a business selling goods is responsible for making a subjective decision about the intent of a buyer, the business may not be fully competent to make the decision.

If buyers intend to consume the goods themselves, then the seller must collect a tax on the purchase price. If instead buyers intend the goods as capital goods, to be resold at a profit after adding value to them, then the seller must not collect the tax. Additionally, sellers have an incentive to claim that a sale is not taxable in order to please customers; this slight conflict of interest could, and probably would, result in an under-collection of taxes.

The refund portion of a VAT removes that incentive, and incentivizes accurate collection. If the buyer is a businessperson, then that VAT is a temporary payment to the state, based on the purchase price, eventually to be reimbursed by the state for the initial payment when the goods are resold, usually after adding value to them. Hence collecting the tax is a way to get money back. Consumers, with no possible refund, have no reason to inaccurately report their intended use.

A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that with the sales tax, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, on the other hand, collections of money, remittances to the government, and credits for taxes that are already paid occur each time a business in the supply chain purchases products.

Value-added tax or value added tax (VAT) is a consumption tax levied in the United Kingdom by the national government. It was introduced in 1973 and is the third largest source of government revenue after income tax and National Insurance. It is administered and collected by HM Revenue and Customs, primarily through the Value Added Tax Act 1994.

VAT is levied on most goods and services provided by registered businesses in the UK and some goods and services imported from outside the European Union. There are complex regulations for goods and services imported from within the EU. The default VAT rate is the standard rate, 20% since 4 January 2011. Some goods and services are subject to VAT at a reduced rate of 5% (such as domestic fuel) or 0% (such as most food and children's clothing). Others are exempt from VAT or outside the system altogether.

Under EU law, the standard rate of VAT in any EU state cannot be lower than 15%. Each state may have up to two reduced rates of at least 5% for a restricted list of goods and services. The European Council must approve any temporary reduction of VAT in the public interest.

VAT is an indirect tax because the tax is paid to the government by the seller (the business) rather than the person who ultimately bears the economic burden of the tax (the consumer). Opponents of VAT claim it is a regressive tax because the poorest people spend a higher proportion of their disposable income on VAT than the richest people. Those in favour of VAT claim it is progressive as consumers who spend more pay more VAT.