What Is VAT and How Do I Claim It Back?

Euro paper money
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If you are a visitor planning to hit the UK's annual sales, did you know you can save a lot by claiming your UK VAT refund?

Perhaps you've seen signs about UK VAT refunds in some of the better shops, those popular with tourists and those selling higher priced goods, and wondered what that's all about. It's worth finding out because VAT, or V.A.T. as it is also known, can add a hefty percentage to the cost of the goods you buy. But the good news is, if you don't live in the EU and you are taking the goods home with you, you don't have to pay VAT

Will Brexit Affect VAT?

DATELINE JANUARY 10, 2019: VAT is a tax imposed on goods that is required of all countries in the EU. How this will be affected by Brexit for visitors is still very much up in the air.  At the moment, part of the money collected as VAT goes to support the EU administration and budget. That is why non-EU residents can reclaim it when taking newly purchased goods to non-EU countries. Once Britain leaves the EU, they won't have to collect VAT to support it. But only part of the VAT collected goes to the EU. The rest goes into the coffers of the country that collects it. Will Britain just convert VAT into a sales tax for itself and keep collecting the money? It's too early to say. Nobody really knows what conditions will prevail the UK leaves the EU. Will there be a negotiated deal (soft Brexit), no deal (hard Brexit), or will we leave the EU at all? At the time of writing, all this remains to be settled. As a guess, it's likely that the UK will still impose some sort of sales tax and, without the EU element, it may be lower than current VAT. But whether that will happen and whether you may still be able to reclaim it remains in limbo for ordinary shoppers. Check the HM Customs & Excise website closer to the Brexit deadline but be prepared to slog through a lot of irrelevant information.

What Is VAT?

VAT stands for Value-Added Tax. It's a kind of sales tax on goods and services that represents the value added to the basic product between the supplier and the next buyer in the chain. That's what makes it different from an ordinary sales tax.

On an ordinary sales tax, the tax on the goods is paid once, when the item is sold. But with VAT, every time an item is sold—from the manufacturer to the wholesaler, from the wholesaler to the retailer, from the retailer to the consumer, VAT is paid and collected.

In the end, though, only the end consumer pays because businesses along the chain can reclaim the VAT they pay from the government in the course of doing business.

All the countries of the European Union (EU) are required to charge and collect VAT. The amount of the tax varies from one country to the next and some, but not all the VAT goes to supporting the European Commission (EC). Each country can decide what goods are "VAT-able" and which are exempt from VAT.

How Much Is VAT in the UK?

The VAT on most taxable goods in the UK is 20 percent (since 2011, though the government can raise or lower the rate from time to time). Some goods, like children's car seats, are taxed at a reduced rate of 5%. Some items, like books and children's clothing, are VAT-free. To make things even more confusing, some items are not "exempt" but "Zero-rated". This means that at the moment, no tax is charged on them in the UK but they may be within the tax charging system in other EU countries.

How Do I Know How Much I've Paid?

As a consumer, when you buy goods or services from a retail shop, or from a catalogue aimed at consumers, the VAT is included in the stated price and you won't be charged any additional tax - that's the law.

Since the VAT, at 20% (or sometimes at 5% for special kinds of goods) is already added in, you need to get out your calculator and do some basic math if you want to know how much of the price is tax and how much is simply the value of the goods or services. To determine the price without VAT, multiply the asking price by the percentage of the VAT in the country of which you're shopping. Say it's 20%, you'd multiply the asking price by 0.20 to calculate VAT amount.

Sometimes, for more expensive items, the merchant may show the VAT amount on the till receipt, as a courtesy. Don't worry, that's just for information and doesn't represent any extra charge.

What Goods Are Subject to VAT?

Almost all the goods and services you buy are subject to VAT at 20%. Some things, like books and periodicals, children's clothing, food and medicines, are free of VAT. Others are rated at 5%. Check HM Revenue & Customs for a list of VAT Rates.

Unfortunately, with the aim of simplifying the list, the government has geared it towards businesses buying, selling, importing and exporting goods—so it's very confusing and time wasting to ordinary consumers. If you just keep in mind that most things are taxed at 20%, you can be pleasantly surprised when they are not. And anyway, if you are leaving the EU after your trip to the UK, you can reclaim the tax you've paid. 

How Do I Get a Refund?

Ah, at last we come to the heart of the matter. Getting a VAT refund when you leave the UK for a destination outside the EU is not difficult but can be time consuming. So, in practice, it's only worth doing for things you've spent a bit of money on. Here's how you do it:

  1. Look for shops displaying signs for the VAT Refund Scheme. This is a voluntary scheme and shops don't have to offer it. But shops popular with overseas visitors usually do.
  2. Once you've paid for your goods, shops running the scheme will provide you with a VAT 407 form or a VAT Retail Export Scheme sales invoice.
  3. Fill out the form in front of the retailer and provide proof that you are eligible for the refund—usually your passport.
  4. At this point the retailer will explain how your refund will be paid and what you should do once your form has been approved by customs officials.
  5. Keep all your paperwork to show to customs officials when you leave. This is especially important if you are taking the goods with you but going on to another EU country before leaving the UK.
  6. When you finally leave the UK or the EU for home, outside the EU, you must show all your paperwork to customs officials. When they approve the forms (usually by stamping them), you can arrange to collect your refund by the method you've agreed with the retailer.
  7. If no customs officials are present, there will be a clearly marked box where you can leave your forms. Customs officials will collect them and, once approved, notify the retailer to arrange your refund.

And by the way, VAT is only reclaimable on goods you take out of the EU. The VAT charged on your hotel stay or dining out is not—even if you pack it up in a doggy bag.

For more information visit the UK government's consumer information website.