VAT Explained

What is VAT?

VAT stands for Value Added Tax. It is a consumption tax applied to goods and services at each stage of the supply chain, from production through to the final sale. Over 170 countries use VAT or an equivalent system, making it one of the most widespread taxes in the world.

How Does VAT Work?

VAT is charged at each step of the supply chain — from raw materials to manufacturer, manufacturer to wholesaler, wholesaler to retailer, and retailer to consumer. However, each business in the chain can reclaim the VAT it paid on its purchases. This means the tax does not accumulate — only the final consumer, who cannot reclaim it, bears the full cost.

VAT vs Sales Tax — What is the Difference?

Both VAT and sales tax are consumption taxes, but they work differently. Sales tax (used in the United States) is only charged once — at the final point of sale to the consumer. VAT is charged at every stage of production and distribution, but businesses reclaim what they paid. The end result is mathematically the same — the consumer pays the same amount — but VAT is harder to evade because every business in the chain has an incentive to demand a valid VAT invoice from their supplier.

What Does IVA Mean?

IVA is simply the local name for VAT in several countries. It stands for different things in different languages but refers to the same tax. Countries that use IVA include Portugal, Spain, Italy, Mexico, and several others.

Who Pays VAT?

In economic terms the final consumer pays VAT — it is built into the price of everything they buy. Businesses act as collectors: they charge VAT to their customers, reclaim VAT on their own purchases, and remit the net amount to the government through regular VAT returns.

Businesses that are not VAT-registered — either because they are below the registration threshold or because they supply exempt services — cannot reclaim VAT on their purchases, making it a real cost to them.

Why Does VAT Exist?

Governments use VAT to raise revenue efficiently. It is harder to evade than income tax because every transaction in the supply chain creates a paper trail — each business claims back VAT paid to the previous step, which means every step is recorded. VAT typically accounts for 15–25% of government revenue in countries that use it.

How is VAT Calculated?

To add VAT to a net price: multiply by (1 + rate/100). For 23% VAT on EUR 100: 100 x 1.23 = EUR 123. To remove VAT from a gross price: divide by (1 + rate/100). For 23% VAT on EUR 123: 123 / 1.23 = EUR 100. See our full VAT formula guide or use our free calculator to do it instantly.

Frequently Asked Questions

Is VAT the same as GST?

Yes, essentially. GST (Goods and Services Tax) used in Australia, Canada, India, New Zealand and others is the same concept as VAT — a consumption tax applied through the supply chain. The name differs by country but the mechanics are identical.

Do all countries have VAT?

Over 170 countries use VAT or GST. The main exception is the United States, which uses state-level sales taxes instead. Some very small countries and tax havens have no consumption tax at all.

Can I reclaim VAT?

VAT-registered businesses can reclaim VAT paid on business purchases through their VAT return. Consumers generally cannot reclaim VAT except in specific cases such as tourist VAT refund schemes for non-EU visitors purchasing in EU countries.

What is input VAT and output VAT?

Output VAT is the VAT you charge your customers on your sales. Input VAT is the VAT you pay on your business purchases. Your VAT return calculates the difference — if output exceeds input you pay the difference to the government; if input exceeds output you receive a refund.