Understanding VAT
A tax that follows the value.
Value-Added Tax is everywhere except the United States, and it pays to read it correctly.
Net, gross, and the percent.
The net price is the price before tax. The gross price is the price including tax. VAT is the difference, charged as a percentage of the net. If you only have the gross and want to find the net, divide by 1 + rate: a £120 gross at 20% has a £100 net, because £100 × 1.2 = £120.
gross = net × (1 + rate) · net = gross ÷ (1 + rate)
VAT vs sales tax.
The US uses sales tax — applied once, at the final purchase. VAT is collected at every stage of the supply chain, with businesses claiming back the VAT they paid on inputs. The consumer's experience looks similar (a tax line at checkout) but the plumbing is very different. VAT is harder to evade and harder to administer.
Standard, reduced, and zero rates.
Most VAT regimes have a standard rate (15–25%, depending on the country) and at least one reduced rate for essentials like food, medicine, books and children's clothing. Some items are zero-rated (charged 0% but still inside the VAT system, so businesses can reclaim) and some are exempt (outside the system entirely).
Standard rates around the world
- UK 20% · Germany 19% · France 20% · Italy 22%
- Australia 10% (called GST) · Canada 5–15% (GST + provincial)
- India 5–28% (GST, varies by category)
- UAE, Saudi Arabia 5%
Reading a price tag.
In the UK and EU, posted retail prices include VAT by law. In the US, sticker prices exclude sales tax. Knowing which regime you're shopping in tells you whether the number on the tag is what you'll actually pay.