VAT: the tax hidden in the price
You have paid tax today without noticing. Value Added Tax is built into the shelf price of most things, which is exactly why it is easy to forget it is there.
Lesson overview
What you'll learn in this lesson
Understand a range of financial products and services, and how public money is raised and spent
Key learning points
- • Added at every stage
- • Working out the VAT in a price
- • Different rates for different things
- • Is VAT fair, and what else is taxed?
This lesson at a glance
- 30 minutes
- 18 parts to scroll through
- 4 quick checks
- Marked quiz at the end
- Gentle pace: short sittings with pauses
Words to know
Scroll down — the lesson carries on below
Watch & discover
Part 1 of 18
Watch first
VAT: the tax hidden in the price
An English teaching video on this topic from IMF. Watch it, then scroll down for the lesson.
In a nutshell
Understand a range of financial products and services, and how public money is raised and spent
What you already know
Part 2 of 18
Before we start
What you already know
You know the government raises money through taxes including income tax and National Insurance.
Key words
Part 3 of 18
Key words
Words you'll need today
- VAT
- Value Added Tax: a tax on the sale of most goods and services.
- Standard rate
- The main VAT rate, currently 20% in the UK.
- Reduced rate
- A lower VAT rate, 5%, on items such as domestic energy.
- Zero-rated
- VAT charged at 0%, for example most food, books and children's clothes.
- Exempt
- Outside VAT altogether, such as most insurance and postage stamps.
- Indirect tax
- A tax on spending rather than on income.
- Regressive
- Taking a larger share of income from those who earn less.
Learning cycle
Part 4 of 18
Learning cycle 1 of 2
How VAT works
A short piece of teaching, then a check to make sure it has landed.
Explore the idea
Part 5 of 18
Learn
Added at every stage
VAT is charged each time value is added along a chain. A timber yard sells wood to a workshop and charges VAT; the workshop sells a chair to a shop and charges VAT; the shop sells to you and charges VAT. Each business reclaims the VAT it paid and hands HMRC only the tax on the value it added. The final consumer — you — is the only one who cannot reclaim it, which is why VAT is ultimately a tax on spending.
Explore the idea
Part 6 of 18
Learn
Working out the VAT in a price
At the standard rate of 20%, a £40 pre-VAT item costs £40 × 1.2 = £48. Going backwards is where people slip: to find the VAT inside a £48 price you divide by 1.2 to get £40, then subtract, giving £8. You do not take 20% of £48. Businesses must register for VAT once turnover passes the registration threshold, and they then charge and reclaim it on every sale.
Quick check
Part 7 of 18
Quick check
An item is £60 before VAT. At 20%, the price you pay is
Reset break
Part 8 of 18
Pause
That's sitting 1 of 2 done
Stretch, get a drink, look out of the window. There is no timer and nothing is counting down — your place is saved, so you can come back in five minutes or tomorrow.
Quick check
Part 9 of 18
Quick check
A gross price of £120 includes 20% VAT. How much VAT is in it?
Learning cycle
Part 10 of 18
Learning cycle 2 of 2
Rates, fairness and other duties
A short piece of teaching, then a check to make sure it has landed.
Explore the idea
Part 11 of 18
Learn
Different rates for different things
Not everything carries 20%. Domestic gas and electricity are at the 5% reduced rate. Most food, books, newspapers, children's clothing and prescriptions are zero-rated. Insurance, postage and some education are exempt. The lines are politically argued over precisely because they change what the essentials cost — the long dispute over whether particular snacks are cakes or biscuits was really an argument about zero-rating.
Explore the idea
Part 12 of 18
Learn
Is VAT fair, and what else is taxed?
VAT is often called regressive: two people buying the same trainers pay the same tax, but that tax is a bigger share of a low income than a high one. Zero-rating essentials softens this. Alongside VAT, the government charges excise duties on fuel, alcohol and tobacco, partly to raise money and partly to discourage use, plus Vehicle Excise Duty, Stamp Duty on property, and Air Passenger Duty. Together these spending taxes raise a large share of total revenue.
Quick check
Part 13 of 18
Quick check
Which is normally zero-rated?
Quick check
Part 14 of 18
Quick check
VAT is described as regressive because
Common mix-ups
Part 15 of 18
Common mix-ups
Things people often get wrong
- Calculating the VAT inside a gross price by taking 20% of it. Divide by 1.2 first, then subtract.
- Thinking everything carries 20% VAT. Food, books and children's clothes are mostly zero-rated.
- Confusing zero-rated with exempt. Zero-rated sales are inside the VAT system at 0%; exempt sales are outside it.
- Believing businesses pay VAT as a cost. They collect it, reclaim their own, and pass the rest to HMRC.
- Assuming a tax everyone pays at the same rate must be fair on everyone equally.
Challenge round
Part 16 of 18
Game · Sort it
Which of these are true?
Drag each card into the right column. Tap a card first if dragging is fiddly.
True
Not true
Mastery quiz
Part 17 of 18
Marked quiz
End of lesson quiz: VAT: the tax hidden in the price
6 questions, marked with the reasoning shown. No timer.
1. VAT is a tax on
2. The UK reduced rate of 5% applies to
3. A £30 pre-VAT service at the standard rate costs
4. Who ultimately bears the cost of VAT along a supply chain?
5. Excise duty on fuel and tobacco is charged partly to
6. 'Exempt' from VAT means the sale is
Lesson round-up
Part 18 of 18
Lesson round-up
Ready when you are
Quiz score
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Points this lesson
0
Best run
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Luna: 0 out of 4 on the practice checks. Only if you feel up to it — one more?
Ask LunaDo the work
Your written work for this lesson
This is the part you'd do in your book at school. Pick the pieces below, write here or on paper, and photograph anything you draw or work out.
Should the town centre have a curfew for under-16s?
After a rise in reported vandalism, Harbrook council proposed that under-16s should not be in the town centre after 9 pm without an adult. Police recorded 62 incidents last year, most between 9 pm and midnight. Shopkeepers signed a petition supporting the plan.
A youth council objected. They pointed out that most young people in town at night were going home from sports clubs or work, that the plan punishes a whole group for the acts of a few, and that the library and the bus interchange are in the town centre. They asked instead for a late bus and a youth space.
The council voted to trial the curfew for six months and to publish the crime figures at the end.
Written for Good Learning Co.
Reading questions
- Give the strongest point on each side of the argument, using a fact from the case.
- Whose rights and whose responsibilities are involved here? Explain both.
- Write your own view on the curfew with reasons and one example.
Reading and response
ReadingRead the case in the lesson again and write what you think should happen, and why it is fair. Use one fact from the case as evidence.
2 paragraphs (PEE)
Extended writing
WritingWrite your answer to the lesson's big question in full: the strongest point on each side, then your own view with reasons and an example.
250–350 words
Reading log
ReadingFind one news story this week that links to this lesson. Note the headline, where you read it, and how it connects.
1 story, 4–5 sentences
Two sides of the argument
WritingWrite the strongest point for, the strongest point against, and then your own view with a reason.
3 paragraphs
Poster or leaflet plan
DiagramPlan a leaflet that explains this right or responsibility to someone your age, then photograph it.
1 planned page
Saved as you type.
Part 1 of 18 · Watch & discover