• VAT, or value added tax, is a sales tax imposed on goods and services sold in the United Kingdom. The United Kingdom has to add VAT to sales because this is a European requirement, and the UK, as a member of the European Union is legally obliged to comply. EU member states can set their own rates of VAT, subject to rules regarding minimum rates, and the United Kingdom has different rates applying apply to different classes of goods.
  
  

Minimum Rate

• The United Kingdom complies with VAT Directive 2006/112/EC, which contains rules regarding the minimum rate of VAT that member states must charge. The minimum standard rate of VAT applied to goods and services is set at 15 percent, but member states are allowed to set two lower rates, not lower than 5 percent, for certain specific goods and services. In the United Kingdom, the standard rate of VAT is set at 15 percent, and the reduced rate is set at the minimum reduced rate of 5 percent for items such as energy-saving materials used in residential buildings, mobility aids for the elderly and sanitary protection products. In the EU, Sweden and Denmark have the highest standard rate of VAT, at 25 percent.
  
  

VAT Exemptions and Zero-Rated Goods and Services

• The EU rules on VAT allow member states to exempt certain goods and services from VAT and apply a rate of zero to others. Exempt goods and services are not subject to VAT rules, and the government would have to pass legislation to bring exempt goods and services into the list of goods and services subject to VAT. Zero-rated products are subject to VAT, and although no VAT is applied to them, a positive VAT rate can be applied without the need for legislation. In the United Kingdom, exempt goods and services include postal services and postage stamps, insurance services, garage and parking space lettings, and eduction provided by an eligible school or college. Zero-rated goods include building services for disabled people, books and magazines, baby wear and passenger transport.
  
  

Place of Supply

• The rate of VAT applied to goods and services, if it applies at all, is determined by rules governing the place of supply. The place of supply means the location where the goods and services are delivered. The general rule is that if you are supplying goods and services to another business, the place of supply is considered to be the location of your customer. If your customer is a nonbusiness customer, then your location is the place of supply. This means that if a UK business supplies goods to a business in another EU country, the UK business does not apply UK VAT to the sale of those goods. However, if a UK business sells goods directly to consumers in another EU country, the UK business has to include VAT in the price charged to the consumer.