It works like this. The tax is based on the difference between the value of the output over the value of the "inputs" used to produce that output.
A widget-maker sells his widget for pounds 10, of which pounds 8 is goods or inputs used to make it, and pounds 2 is profit. If VAT is 10 per cent, the product is sold for pounds 11, with pounds 1 being the tax paid by the buyer. Widget-makers can offset tax paid on goods (inputs) they buy against tax on their own goods.
Ever since it was introduced in Britain in 1973, at a standard rate of 10 per cent, VAT has become increasingly complicated with some products exempted or zero-rated, and different rates levied on various groups of goods and services.
In July 1974, the standard rate was reduced to 8 per cent, and four months later a higher rate - 25 per cent - was introduced on petrol. Two years later, this rate was reduced to 12.5 per cent.
Under Mrs Thatcher, the higher rate was abolished in 1979 and a unified rate of 15 per cent introduced. Since then it has been continually extended.
In 1991 the standard rate increased to 17.5 per cent, and last year, in one of the most controversial VAT decisions ever taken, it was charged at 8 per cent on domestic fuel and power.Reuse content