VAT or Value Added Tax, is classed as being a neutral Tax, this is because no matter how many time the goods change hands before they actually reach the consumer the Tax is only applied once.

The Introduction of VAT

VAT was invented and introduced by a French economist who was joint director of the French Tax Authority. It is classed as an indirect tax meaning that it is collected by someone who is not responsible for the entire cost.
It was originally intended to apply to large businesses and then eventually be rolled out to all businesses and in fact VAT actually accounts for 45% of all of the French state revenues.

VAT in some cases can actually be re claimed, personal consumers cannot re claim VAT on goods and services purchased but businesses can on the materials and services they purchase to create further supplies for consumer purchase. Businesses need to register for VAT when there annual sales reach £67,000.00 per annum, though they may be able to volunteer to register for VAT if the sales are under £67,000.00. Businesses must be VAT registered to be able to claim VAT back on purchases and charge VAT on sales.

VAT in the UK was charged at 17.5%, but following the pre budget announcement back on the 24th November 2008, VAT was actually reduced to 15%. The reduction took effect from the 1st December 2008 to help with the current Credit Crunch climate. The reduction in VAT is set to stay for 13 months and so this will end on the 1st January 2010, after which it will return to 17.5% although there is some speculation that it will in fact be raised above 17.5%.

How the VAT Reduction Saves us Money

Not all purchases have VAT applied, for example Children's Clothes and Footwear are usually exempt from VAT as is most food which we buy from a shop.

The VAT reduction should help the general population save money as retailers and providers have dropped their prices, this should actually tempt consumers back on to the High Streets and increase spending. In monetary terms on what we will actually pay, a pair of jeans which were for sale at £35.99 should have been reduced to £35.29, though many prices are not displayed in store but the price reduction is applied at the till.

We must also keep in mind that although there has been a VAT reduction, Tax on Petrol, Alcohol and Tobacco are rumoured to be increasing to offset this. If this happens the question which must be asked is, is this really a benefit especially as most of our day to day living purchases are actually food on which VAT is not always applied?

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Updated on 16th March, 2009

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