In the United Kingdom, as throughout the European Union, most goods and services are levied with a Value Added Tax, or VAT. Although the finer points are not exactly like a the sales tax that U.S. places on these items, for the consumer the end result is the same: purchased items cost a certain percentage more than their face value because of the additional tax.

VAT Rate

Between Dec. 1, 2008, and Dec. 31, 2009, the United Kingdom lowered its standard VAT rate to 15 percent, the minimum allowed by the European Union. As of Jan. 1, 2010, it is scheduled to return to the former rate of 17.5 percent.

Prices

Unlike sales tax in most U.S. cities, the price you see on the store shelf is the price you pay. For consumer convenience and easy pricing, retailers almost always show the cost of an item including VAT instead of adding it on when you pay for it.

Reduced-rated Items

Certain items are eligible to be taxed at a reduced rate; as of November 2009, the reduced rate was 5 percent. Examples of reduced-rated goods and services include home electricity and gas services, children's car seats and sanitary hygiene products.

Zero-rated Items

A wide range of daily necessities receive a 0 percent VAT rate. Food purchased from a grocery store (as opposed to restaurant and takeaway meals), public transport, children's clothes and books are not taxed.

Exempt Items

While the end effect on the consumer is the same, zero-rated items may have been taxed at some point in their supply chain, but certain items are exempt from the VAT or fall outside the scope of the VAT entirely. Insurance, membership subscriptions and medical and dental services are all VAT exempt, and fees that are fixed by law (for example, the London congestion charge) are outside the scope of the VAT.

Refunds for Travelers

According to HM Revenue & Customs, visitors to the United Kingdom from outside the European Community may be eligible to receive a VAT refund upon leaving the country. Items must be purchased from a shop participating in the VAT Retail Export Scheme. Additionally, the retailer must provide an official customs form VAT 407, their own version of form VAT 407 or a VAT Retail Export Scheme sales invoice; the cash register receipt is not enough proof to qualify for a refund. When leaving the country, you must show your purchases and refund forms to customs before baggage check-in. Once customs has certified your form, you can present it at a refund booth at the airport for an immediate refund, or you can mail it to the original retailer or a commercial refund company, depending on your agreement with the seller at the time of purchase. Although there are several steps involved in reclaiming VAT expenses, it's a great way to save money on your trips abroad.

Source:

Introduction to VAT

VAT Refunds for Travellers