How does VAT work?

image showing different items and one of the three VAT rates.

There are three bands of VAT: zero, 5% and 20%. Many regular purchases such as food and children's clothing are zero-rated. Domestic fuel and wind-turbine installation are 5%. Other things like hot take-aways and televisions are 20%.

image showing three teddy bears marked up at different prices with different VAT rates.

The government has raised the standard VAT rate to 20%. This is the effect that has had on a teddy that previously cost 9.99.

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Value added tax, or VAT, is the tax you have to pay when you buy goods or services.

There are various items for which you do not have to pay any VAT, such as most food, children's clothing, newspapers and magazines.

The standard rate of VAT rose from 17.5% to 20% on 4 January 2011, which is still not high by EU standards.

Standard rates of VAT in the European Union

Country VAT % Country VAT % Country VAT %

Source: TMF Group

Austria

20

Germany

19

Netherlands

19

Belgium

21

Greece

23

Poland

23

Bulgaria

20

Hungary

25

Portugal

23

Cyprus

15

Ireland

21

Romania

24

Czech Republic

20

Italy

20

Slovakia

20

Denmark

25

Latvia

22

Slovenia

20

Estonia

20

Lithuania

21

Spain

18

Finland

23

Luxembourg

15

Sweden

25

France

19.6

Malta

18

UK

20

The government hopes that the increase in UK VAT will raise an extra £13bn a year by 2015.

Labour has said that the increase will threaten the fragile economic recovery.

Calculate VAT rise

How much more do things cost following the VAT rise to 20%?

Price £

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