Value Added Tax (VAT) is levied on most business transactions and on many goods and some services.
Most purchases carry a VAT charge
BBC News explains how VAT works and who has to pay it.
There are three rates of VAT in the UK: the standard rate - currently reduced from 17.5% to 15%, until 31 December 2009; the 5% "reduced" rate, and 0% "zero" rate.
If you run a business or work for yourself you will probably have to register for VAT if your taxable turnover reaches a certain limit, if you take over a business as a going concern or you buy goods from elsewhere in the EU.
The VAT registration level is £67,000 of your taxable turnover, but businesses with turnovers of less than this limit can also register if they wish.
Companies over the £67,000 limit which fail to register can be fined.
Goods and services liable to VAT are called "taxable supplies". If your business turnover reaches the registration threshold, it must be registered for VAT and the business must charge VAT on all taxable supplies.
VAT doesn't apply to services such as insurance, some types of education, training and loans, as these are deemed to be "exempt".
VAT advice line
The amount owed to Revenue and Customs is the difference between your output tax and input tax.
Output tax is the VAT charged to your VAT-registered customers, and VAT charged by suppliers to your business is your input tax.
To work out what is owed to Revenue and Customs, deduct your input tax from your output tax. If input tax is greater than output tax, a refund may be owed.
Should I register?
Even if your taxable turnover is below £67,000, you may be eligible to apply for 'voluntary registration'.
There are advantages and disadvantages to registering voluntarily - and it is important to weigh up the pros and cons.
Revenue and Customs says one of the benefits is increased "credibility" but maybe the more important benefit is, if your business makes standard or zero-rated supplies, you'll be able to claim back input tax.
Once registered for VAT, however, it can be a hassle.
You'll have to keep careful VAT records and accounts, account for output tax on all your taxable supplies, and send in VAT returns regularly.
For information, call Revenue and Customs helpline: 0845 010 9000.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.