VALUE ADDED TAX (VAT)

VAT is a general sales tax which applies to a wide range of goods and services. The tax is charged to the sellers of output and their tax liability amounts to a percentage of the value added at that particular stage of production. The firms engaged in the production of a commodity add VAT to the value of their outputs, but they deduct from this figure the amount of VAT already paid on their inputs. In other words they pay only on the value added by their particular activities.

Certain goods and services are given special treatment; they are either exempt or zero-rated. When goods and services are exempt the trader does not charge his customer any output tax, but he cannot claim back any VAT already paid on his inputs. Exemption from VAT applies to land (including rents), insurance, postage, betting and gaming, finance, education, health services, burial and cremation.

Zero-rating means complete relief from VAT. A trader does not charge VAT on the goods and services he sells and he can reclaim any VAT which has been paid on his inputs. Zero-rating applies to exports, food (except meals out), children's clothing and footwear, books, newspapers fuel (except road fuel), construction, passenger transport, drugs, and medicines on prescription and certain supplies to charities.

A major reason for the introduction of VAT in the UK was that it is a necessary condition of EEC membership. Since VAT is not levied on exports (i.e. exporters can reclaim any VAT already paid on the goods) it should provide some incentive to exporters.

(from "Introductory Economics" by Stanlake G.F.)

I. Answer the following questions:

1. To whom is VAT charged?

2. How is their tax liability defined?

3. What does special treatment of certain goods and services mean?

4. What is exempt of VAT?

5. What items are zero-rated?

6. What does the trader do in case of zero-rated VAT goods and services?

7. Why was VAT introduced in the UK?