Define: VAT

VAT (value added tax) is a consumption tax charged on most goods and services supplied in the course of business. In a contract, VAT means value added tax chargeable under the Value Added Tax Act 1994 (VATA), under any legislation replacing it, or under any legislation the VATA replaced. It also means value added tax at the rate in force when the relevant supply is made, together with any tax of a similar nature introduced in substitution for it. In plain terms, the definition fixes which tax the parties are talking about and ties the amount payable to the rate that applies on the day the supply happens, rather than the day the contract was signed.

Legal accuracy standard set & glossary spot-checked by Imad Mohammed Nazar , Skadden-trained M&A lawyer, Legal Engineer at GenieAI

In practice, a VAT definition tells both sides of a deal how the tax is treated on top of the agreed price. It means value added tax chargeable under the Value Added Tax Act 1994, any similar replacement tax, and any similar additional tax. For a business supplying goods or services, VAT is normally added to the net price, collected from the customer, and paid over to the tax authority. The definition matters because it settles whether the stated price is inclusive or exclusive of VAT, which party carries the cost, and how the amount is calculated if the standard rate, a reduced rate, or a zero rate applies to the supply. A company that gets this wrong can end up absorbing a tax it expected to pass on.

As a worked example, suppose a contract sets a fee of 10,000 exclusive of VAT and the standard rate is 20 percent. The supplier invoices 10,000 plus 2,000 VAT, so the customer pays 12,000 and the supplier accounts for the 2,000 to the authority. If the definition had said the price was VAT inclusive, the 10,000 would already contain the tax, leaving the supplier with 8,333.33 net. The definition also covers any tax replacing VAT, so the clause keeps working if the rate changes or a successor tax is introduced during the life of the agreement. This is why many contracts pair the definition with a gross-up or valid VAT invoice requirement, so the paying party knows exactly what to expect and can recover input tax where eligible.

Relevant Circumstances

When a UK supply of goods or services is potentially within the charge to VAT
If parties need to allocate responsibility for VAT in addition to the headline price
Where a contract requires gross-up, recovery or invoicing in the correct VAT form
In the event the VAT rate or treatment changes during the life of the agreement
When a business or company needs to confirm whether a quoted price is VAT inclusive or exclusive before signing
Where a cross-border supply raises the question of which jurisdiction's VAT rules apply

Define: VAT

Relevant Circumstances

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