4 January 2011 Last updated at 15:58

How does VAT work?

By Anthony Reuben Business reporter, BBC News Continue reading the main story

There are three bands of VAT: zero, 5% and 20%. Many regular purchases such as food and children's clothing are zero-rated. Domestic fuel and wind-turbine installation are 5%. Other things like hot take-aways and televisions are 20%.

The government has raised the standard VAT rate to 20%. This is the effect that has had on a teddy that previously cost £9.99.

Value added tax, or VAT, is the tax you have to pay when you buy goods or services.

There are various items for which you do not have to pay any VAT, such as most food, children's clothing, newspapers and magazines.

The standard rate of VAT rose from 17.5% to 20% on 4 January 2011, which is still not high by EU standards.

Standard rates of VAT in the European Union
Country	VAT %	Country	VAT %	Country	VAT %
Source: TMF Group
Austria	20	Germany	19	Netherlands	19
Belgium	21	Greece	23	Poland	23
Bulgaria	20	Hungary	25	Portugal	23
Cyprus	15	Ireland	21	Romania	24
Czech Republic	20	Italy	20	Slovakia	20
Denmark	25	Latvia	22	Slovenia	20
Estonia	20	Lithuania	21	Spain	18
Finland	23	Luxembourg	15	Sweden	25
France	19.6	Malta	18	UK	20

The government hopes that the increase in UK VAT will raise an extra £13bn a year by 2015.

Labour has said that the increase will threaten the fragile economic recovery.

Calculate VAT rise

How much more do things cost following the VAT rise to 20%?

Price £