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Accounting
Value Added Tax
A consumption tax charged on most goods and services — businesses collect it and pay the net amount to the government.
VAT is an indirect tax. Registered businesses act as collectors. They record input VAT (paid on purchases) and output VAT (charged on sales). The difference is paid or reclaimed every quarter.
It's like being a tax collector for the government every time you sell something.
Real world: A shop sells a laptop for £1,000 plus 20% VAT (£200). The customer pays £1,200. The shop reclaims VAT it paid on purchases and only hands over the difference to HMRC.
💡 VAT is cash-flow neutral for most businesses — they collect it from customers and pass it on.