Value Added Tax (VAT)

Meaning and Definition

Value Added Tax (VAT) is a consumption tax levied on the sale of goods and services in the United Kingdom. It is added to the final price of a product or service and is collected by businesses on behalf of the government. The standard rate of VAT in the UK is set by the government and is currently 20% (as of September 2021).

Why it is important to know

Understanding VAT is important for car buyers and car finance borrowers as it affects the cost of purchasing a vehicle. When buying a car, the price advertised or negotiated typically excludes VAT. The VAT is added to the final price, including any additional charges or options, and must be paid by the buyer. Car finance borrowers should factor in the VAT when budgeting for their vehicle purchase and consider whether it is included in the loan amount or needs to be paid separately.

Example in car finance

Suppose a car has an advertised price of £15,000. If the VAT rate is 20%, the final price of the vehicle, including VAT, would be £18,000 (£15,000 + 20% VAT). When applying for car finance, borrowers need to consider whether the VAT amount is included in the loan amount or if it needs to be paid upfront as part of the initial deposit. It is important to clarify the VAT arrangements with the dealer or finance provider to accurately determine the loan amount and repayment obligations.