Is sales tax and VAT the same in the UK? This is the question asked most often by a number of people in different countries globally. Many countries have both sales tax and VAT simultaneously. However, other countries use it interchangeably.
Surprisingly, both sales tax and VAT are quite different from each other for a number of reasons. In the UK, sales tax and VAT overlap for a number of products and services and this is the reason many people get confused while paying taxes on their wholesale or end-user purchase.
In this blog, we will shed light on sales tax and VAT and how these two taxes are different from each other. Moreover, we will discuss the VAT and sales tax rates in the UK and how you can pay VAT to the HMRC. So, let’s start!
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What is a Sales Tax?
Sales tax is a type of tax applied to the sales of goods and services and the end-user is responsible for paying this tax. The sellers or manufacturers collect this tax by including the price of their products and services. After the collection, the businesses pay the sales to the relevant authorities of the governments.
Sales tax is applied by the state government. The sales tax rate is proportional to the price of the products. This rate may vary from 10% to 20% depending on the requirements of the government. Recently, the UK government introduced the concept of Online Sales Tax (OST) to foster and encourage online businesses and levy a small percentage of sales tax on the revenues generated by online and e-commerce businesses.
What is a Value-Added Tax (VAT)?
Conversely, the value-added tax is the opposite of the sales tax. It is collected at each stage of the production of goods and services. In the UK, all the businesses involved in the production and distribution of their products and services collect VAT.
Sometimes, VAT is passed on to the end users and they also pay VAT on the products and services the final user buys. Similarly, every business will calculate the net VAT after the calculation of the input VAT and output VAT.
The output VAT is charged when a business sells its goods and services to other businesses or consumers. On the other hand, Input Vat is tax paid by a business that has purchased the goods and services from another business.
Simply put, the output VAT can be considered a sales tax when it is paid by the final user and it is charged by the retailer. The VAT-registered businesses can keep all the invoices and calculate the net VAT. The VAT can also be reclaimed from HMRC in case the input VAT is more than the output VAT.
What are the VAT Rates in the UK?
There’s no single VAT rate in the UK. The VAT rate has been divided into three categories. These VAT rates are as follows:
- Standard Rate: 20%
- Reduced Rate: 5%
- Zero Rate: 0%
On most of the goods and services in the UK, the standard of VAT is applicable. However, there are some goods where a VAT reduced rate is applicable. For example, children’s car seats and domestic energy etc. Most of the essential items are exempt from VAT and are counted as zero-rated by the HMRC.
To be eligible to pay VAT as a business person or organisation, HMRC has established a threshold of turnover. A self-employed person must have an annual turnover of £85,000 for getting VAT registered. On the other hand, business organisations must have an annual turnover of at least £150,000.
Is Sales Tax and VAT the Same?
Although Sales Tax and VAT are different from each other. These two types of taxes also differ in the way they are collected. For example, VAT is collected during each stage of production, while the sales tax is collected only at the final stage of consumption.
However, there are some countries where sales tax is collected only. For example, there’s no VAT on the production of goods and services in the USA. The government collects the sales tax by including it in the price of the final products.
On the other hand, the VAT is collected from every business in a supply chain and customers also pay VAT at the standard and reduced rates in the UK. So, we can say that the VAT and sales tax is the same in the UK.
The Bottom Line
Wrapping up, we can say that the nature of sales tax and VAT is different from each, but they serve the same purpose of paying the tax to the government ultimately. The main advantage of using VAT is the increase in the revenues of the government and the lower chances of evading taxes.
On the other hand, sales tax puts all the burden on the consumers, where all the businesses pass on the tax burden to the final product’s price. If we talk specifically about the UK, the VAT and sales tax are the same and they are collected at the same standards, reduced and zero rates.
Disclaimer: All the information provided in this article on is tax and vat the same, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.