What Is the Value-Added Tax? (VAT)

A value-add tax is a consumption tax that is added to a products and services at every stage in its supply chain where value is added, between the different entities.

What is VAT Example?

For example, let’s say a company is selling a dining table. The wood is taxed when the raw materials are sold to the factory. When the factory sells the finished dining table to a wholesaler or distributer, it is again taxed. And when the wholesaler or distributer sells the dining table again, to the end customer, the consumer, it is taxed again.

VAT is usually a percentage of the total cost paid by the consumer of the product. If your store buys wood for $100 and the VAT is 10%, you would pay $110 for the wood. The seller of the wood would then keep the $100 and remit $10 to the government. If you then used the wood to build a table valued at $200, you would charge the customer $220 for the table so that you could pay the $20 VAT to the government.  

What is the VAT Rate in UK?

The United States does not have a VAT, but many countries do have VAT with different rates, including many of the European Union countries. In the UK, the standard rate of VAT (with exceptions for certain goods) has been 20% since 2011.

What Changes Are Occurring with the UK VAT?

With the end of the Brexit transition period finally upon us, many ecommerce merchants are scrambling to make sure they can still serve customers in the UK. Here are the high-level details of the new VAT scheme that the UK government put into effect on January 1, 2021.

For goods imported into the UK in consignments not exceeding £135 in value, VAT is now charged at the point-of-sale (i.e. during checkout) instead of at the point of importation. For the purposes of this policy, a consignment is a group of goods delivered to a person, in this case your customer.

Additionally, the Low-Value Consignment Relief went away. This rule previously exempted goods valued at £15 or less. 

Value-Add Tax

The seller may pay the import VAT (and duties) on clearance and reclaim if they have a UK VAT number. Alternatively, the seller may opt to have their customer pay at customs. Only the owner of goods at the time of the import can reclaim the VAT.

To comply with these changes and sell your goods into the UK:

1) You will need a UK VAT Number.

2) VAT will be collected on ALL low-value orders shipped to the UK.

3) Merchants must remit VAT to the UK.

Read more here.