# VAT

Value added tax (VAT) is payable to the government by a business. VAT is a purchase tax added onto items that are bought, except things that are zero-rated, such as food, because these are deemed essentials.

VAT is a percentage of the cost and this is determined by the government. Currently it stands at 20% having been increased from 17.5%.

### Example

A car costs £19,800 including VAT. VAT is charged at 20% so £19,800 represents 120% of the price before VAT. What is the price before VAT?

10% is: 100% is: The price before VAT is added is £16,500.

Question

Sue invests £2,000 in an account for two years. The account pays 4% compound interest per annum.

Sue has to pay 20% tax on the interest earned each year. This tax is taken from the account at the end of each year.

How much money will Sue have in her account at the end of two years?

After the first year Sue will earn 4% interest. So she earns £80 interest which is then taxed at 20%.

10% is: So 20% is: Therefore the total interest paid is . So after one year she has in the bank.

After the second year, Sue will earn another 4% interest. So she earns £82.56 interest which is then taxed at 20%.

10% is So 20% is (rounded to 2 dp)

Therefore the total interest paid is . So after two years she has in the bank.

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