What is VAT?
VAT is used in more than 170 countries, including the UK, EU member states, Nigeria, South Africa, Kenya and Ghana. India and Australia use a similar tax called GST. The final consumer bears the tax; businesses act as collectors.
How VAT works
- Output VAT: charged on your sales.
- Input VAT: paid on your business purchases.
- VAT payable = Output VAT − Input VAT
If input VAT is higher, the business may claim a refund.
Example (rate of 7.5%, as in Nigeria)
A manufacturer sells goods for ₦1,000,000 + ₦75,000 VAT. It bought materials for ₦400,000 + ₦30,000 VAT. VAT payable = 75,000 − 30,000 = ₦45,000.
Types of supplies
- Standard-rated: VAT at the normal rate.
- Reduced-rated: a lower rate in some countries.
- [Zero-rated](/glossary/zero-rated-supply): 0% VAT, but input VAT can still be reclaimed.
- Exempt: no VAT charged, and related input VAT usually can't be reclaimed.
Business obligations
- Register once [turnover](/glossary/turnover) passes the threshold.
- Issue valid VAT [invoices](/glossary/invoice).
- File VAT returns and pay on time, usually monthly or quarterly.
- Keep records for the required period.
VAT vs sales tax
[Sales tax](/glossary/sales-tax) is charged once at the final sale; VAT is charged at every stage with credits for input tax.