What is VAT?

Value Added Tax (VAT) is a consumption tax charged on most goods and services. It is collected in stages along the supply chain — every business adds VAT to what it sells and reclaims VAT on what it buys — but the entire economic burden falls on the final consumer. More than 170 countries around the world operate some form of VAT or GST, making it one of the most widely used tax systems on the planet.

If you run a small business or freelance, VAT shows up in two places: on the invoices you send to clients (output VAT) and on things you buy for your business (input VAT). The difference between the two is what you pay to — or reclaim from — the tax authority each quarter.

Imagine a simple chain: a forester sells timber to a sawmill, the sawmill sells planks to a furniture maker, the furniture maker sells a chair to a shop, and the shop sells the chair to you. At each step, the seller adds VAT to the price and the buyer pays it. But every business in the chain reclaims the VAT it paid on its inputs, so it only really hands over the tax on the value it added.

By the time the chair reaches you, the consumer, the full VAT on the final price has been collected — but distributed across every link in the chain. You can't reclaim it, which is why economists call VAT a 'consumption tax'.

Technically, everyone pays VAT at the point of purchase — the price you see in shops, on invoices, and on bills usually includes it. But who bears the cost depends on what they do next.

A regular consumer buys a £1,000 laptop, pays £1,200 (£1,000 + £200 VAT), and that's the end of the transaction. The £200 VAT becomes part of what they spent — they can't get it back.

A VAT-registered business buying the same laptop pays the same £1,200 upfront. But on their next VAT return, they reclaim the £200 from the tax authority. Their actual cost ends up being £1,000 — the net price.

This is the core mechanism of VAT: every business in a supply chain charges VAT on what they sell, reclaims VAT on what they buy, and pays the difference to the government. The tax accumulates as goods and services move through the chain, but it only 'sticks' at the very end — when the final consumer buys it.

That's why VAT is called a consumption tax. It's collected at every stage, but ultimately falls on whoever consumes the product, not on the businesses passing it along.

The rates shown on this site are the standard VAT rates each country charges — the same rate that applies to both individuals and businesses. Use the calculator to work out what to invoice a client (Add VAT), or to see how much VAT was on an invoice you received (Remove VAT).

What you do with the result depends on your situation. If you're a VAT-registered business, the VAT amount on a purchase is something you can usually reclaim. If you're an individual or an unregistered small business, the VAT is part of what you've spent.

If you're used to the US sales tax model, VAT can feel strange. Sales tax is collected only at the very end, by the retailer, and only on sales to consumers. Businesses buying from other businesses typically don't pay it, using resale certificates instead.

VAT, by contrast, is collected at every stage. This makes it harder to evade — there's a paper trail of input/output claims — and it means the tax authority gets paid steadily as goods move through the economy, not just at the final sale.

Goods and Services Tax (GST) is essentially the same thing as VAT, just with a different name. Australia, New Zealand, Singapore, India and Canada all use 'GST'. The mechanics — input credits, output tax, registration thresholds — work the same way.

Some countries (like Canada) layer a federal GST on top of provincial sales taxes, which can make compliance more complex. Others (like Singapore) keep it simple with a single national rate.

Suppose you're a UK freelance designer. You invoice a client £1,000 for a project. Adding 20% UK VAT, the total is £1,200 — the client pays you £1,200 and you set aside £200 for HMRC.

That same quarter you bought a £600 laptop including £100 VAT. You can reclaim that £100 against what you owe. So instead of paying HMRC £200, you pay £200 − £100 = £100.

Net effect: you charged £200 in VAT, paid £100, and HMRC ends up with £100 — the tax on the £500 of value you added (your £1,000 fee minus the £500 net cost of the laptop).

Pricing: if your clients are consumers, adding VAT effectively raises your price. If they're VAT-registered businesses, they reclaim it and don't care.

Cash flow: you collect VAT throughout the quarter and pay it later, which can feel like extra working capital — but it isn't yours.

Compliance: most countries require quarterly returns, with significant penalties for late or incorrect filings.

Use the calculator on the homepage to add or remove VAT for any country, or browse the country comparison page to see how rates and thresholds vary worldwide.

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