Value added tax (VAT) is a consumption tax charged on the value added at each stage of producing and distributing goods and services. Although businesses collect and remit it, the economic burden falls on the final consumer. Registered businesses charge VAT on their sales (output VAT) and reclaim the VAT they pay on purchases (input VAT), passing only the net difference to the tax authority.
Example: a business buys materials for 1,000 plus 200 VAT, then sells finished goods for 2,000 plus 400 VAT. It owes 400 to the authority but reclaims the 200 it paid, so it remits 200 net, the tax on the 1,000 of value it added.
Standard rates differ across Europe: the UK applies 20%, Italy 22%, Germany 19%, France 20%, and Spain 21%, with reduced rates for essentials like food and books. The US has no federal VAT; instead individual states levy retail sales tax.
- Output VAT: charged on sales
- Input VAT: reclaimed on purchases
- Net remitted: output minus input
VAT registration thresholds and filing frequencies vary by country. See tax deduction and payment on account, and compare rates with our compare taxes by country tool.