Before I show you how to calculate VAT, here is a short explanation about what VAT really is.
Value added tax (VAT), or goods and services tax (GST), is tax on exchanges. It is levied on the added value that results from each exchange. It differs from a sales tax because a sales tax is levied on the total value of the exchange. For this reason, a VAT is neutral with respect to the number of passages that there are between the producer and the final consumer. A VAT is an indirect tax, in that the tax is collected from someone who does not bear the entire cost of the tax. To avoid double taxation on final consumption, exports (which by definition, are consumed abroad) are usually not subject to VAT and VAT charged under such circumstances is usually refundable.
VAT is a nationwide tax of 17.5% (or occasionally 5%) levied on almost all goods sold by retailers. VAT accumulates as a product’s value increases. VAT is paid at all levels of production although it is generally consumers who are most affected by this indirect tax.
Now, when you know what VAT is, I will show you how you can calculate it. The one thing you will need is – a calculator. Although there are many online calculators online, you never know if they are correct or not. To be sure, calculate yourself.
Multiply the price of any product as a consumer by 0.175 to work out the amount you are paying in VAT. This will provide you with the VAT figure. For example, if you are buying a computer for £100, the VAT will be 17.5%. Multiply £100 by 0.175 to work out what you are being charged as VAT (£17.50).
Some items with perceived social benefits may have a reduced rate of VAT. Smoking cessation products and items that are useful for elderly people have a VAT rate of 5%.
VAT is not charged on some items such as children’s clothing in the UK. Other products with no VAT include postal services, medical care, lending, insurance and betting.
VAT is calculated on the price charged by a wholesaler or retailer to any other retailer or consumer. It is collected where it is paid and then passed on to government. It is the responsibility of the retailer to ensure this process runs smoothly as they will be financially liable if tax evasion occurs.
VAT is a tax on added value. This means when a retailer buys a product for a lower price and then subsequently increases the price for resale, they are liable to pay the government VAT on the value added to the product only. VAT on the original value will have been paid by the previous retailer.
To cover the cost of VAT added by the wholesaler, retailers may add this amount to the total price of the item, essentially passing the burden of VAT entirely on to the final consumer.
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I'd just point out that the article only shows how to calculate VAT on a net price. If you are being charged a gross price including VAT then the caclulation is to multiply by 7 and divide by 47 or essentially to multiply by 0.149. i.e a Computer for which you paid £117.50 included VAT of £17.50.
