Definition
Value-Added Tax is a consumption tax applied at every stage of a supply chain where value is added. The seller charges VAT on top of the sale price, collects it from the buyer, and pays it to the tax authority — net of any VAT they themselves paid on business inputs (input VAT).
VAT is used in over 160 countries, including the entire European Union, the United Kingdom, most of Asia, Latin America, and Africa. The United States is one of the few major economies that does not use VAT — it uses a sales tax model instead. Rates vary widely: 5 percent in the UAE, 19 percent in Germany, 20 percent in the UK, 25 percent in Sweden.
Why it matters
Money you collect as VAT is never your money. Spending it during the period before you remit it to the tax authority is the most common cause of small business cash crunches. Treat VAT as a separate stream from operating revenue and move it to a dedicated account the day it lands.
Where this appears in your tools
The Tax Survival Calculator separates VAT exposure from income tax. Invoice line totals can be set as VAT-inclusive or VAT-exclusive depending on your default mode, and the invoice template guide shows how to display VAT correctly on the document.
Example
You invoice a UK customer 1,000 plus 20 percent VAT. The buyer pays you 1,200. Of that, 200 is VAT — it belongs to HMRC. If your input VAT for the period is 40 (on business purchases), you owe HMRC 160 at the next return.
Common confusion
VAT is not 'on top' of profit — it is on top of the sale price. The percentage applies to the net invoice value, not your margin. Also, a VAT-inclusive price (e.g. 'price 120, VAT included') still contains a VAT portion you must remit; it is not a discount.