How VAT works: the chain from maker to customer

Value-added tax charges each business in a supply chain only on the value it personally adds, not on the full price of the goods. A business collects VAT when it sells, reclaims the VAT it paid on its own purchases, and hands the difference to the tax authority. That difference, summed across every business in the chain, always equals the VAT on the final sale price. The consumer at the end reclaims nothing, so the full tax lands on them.

The chain, walked through

Picture three businesses passing a product along: a maker, a wholesaler, and a shop.

The maker sells a batch to the wholesaler for a net 100, adding VAT at the standard rate of 23% on top, so the wholesaler pays a gross 123. The maker keeps the 100 and passes the 23 to the tax authority, because it has no VAT of its own to reclaim yet.

The wholesaler marks the batch up and sells it on to the shop. Say the wholesaler’s net sale price works out to the same shape as the earlier step for simplicity: a further net 100 of value added, taxed again at 23% to give a gross 123 charged to the shop. The wholesaler collects that 23 from the shop but reclaims the 23 it already paid the maker. Net result: the wholesaler pays the authority nothing extra on this step, because its input credit cancels its output charge.

The shop sells to the customer, again on the same net-100-at-23%-gives-123 shape. The shop collects 23 from the customer and reclaims the 23 it paid the wholesaler, so it too pays the authority nothing further.

Total collected by the authority across all three steps: 23, from the maker’s step alone, in this simplified walk-through. The customer paid a gross 123 for the final item and cannot reclaim any of it. Every euro of VAT anyone in the chain actually kept for the state traces back to value added somewhere along the line, and the person who added no value onward is the one who absorbs the full 23.

A worked reverse check shows why the maths only goes one way. Take a gross 123 and try to find the VAT by simply taking 23% off the top: 123 minus 23% gives 94.71, which is wrong. The correct net figure is 100, with 23 of VAT sitting inside the 123. Extracting VAT from a VAT-inclusive price needs the rate applied to the gross figure in its proper form, not lopped straight off the total. The same logic scales up: a gross 500 at the standard rate breaks down to a net 406.50 and VAT of 93.50, while a gross 500 at the reduced 13.5% rate breaks down to a net 440.53 and VAT of 59.47. A net 100 taxed at 13.5% instead of the standard rate gives a gross of 113.50. The rate changes the split; it never changes the method.

Why governments like it

VAT is largely self-policing because every reclaim one business makes has to match a sale another business declared. When the wholesaler claims back the 23 it paid the maker, that claim only stands up against an invoice showing the maker charged and declared that same 23. Each link in the chain generates a paper trail that checks the link before it. A business that tries to reclaim VAT it never actually paid needs a matching invoice from a supplier who will have declared that sale on their own return, so the incentive to under-declare on one side is checked by the incentive to over-claim on the other. Tax authorities do not need to watch every transaction directly; they need the chain of invoices to reconcile, and mismatches surface themselves.

What the consumer sees

Across Europe, prices quoted to consumers generally already include VAT. The number on the shelf or the checkout screen is the gross figure the customer actually pays, not the net figure the retailer keeps. A receipt often itemises the VAT as a separate line, but that line is informational: it shows how much of the price just paid was tax, not an amount being added afterwards. By the time a consumer sees a price, the tax is already built in, unlike sales-tax systems elsewhere that add the tax at the till.

Where the exceptions live

Not everything is taxed at a standard rate, and not everything is taxed at all. Zero-rated supplies and exempt supplies both mean no VAT is charged on the sale, but they behave differently for the business making that sale, particularly around whether it can reclaim the VAT on its own costs. The distinction matters more to the seller’s bookkeeping than to the price the buyer sees, and it is covered in full in the glossary entry on zero-rated and exempt supplies.

Ireland illustrates how granular a real VAT system gets. Revenue’s published current-VAT-rates table, effective 1 January 2026 and as of this page’s review, sets a standard rate of 23%, a reduced rate of 13.5%, a second reduced rate of 9%, a livestock rate of 4.8%, and a flat-rate compensation percentage for farmers of 4.5%. The livestock and flat-rate farmer percentages are agricultural by name, reflecting that sector’s distinct treatment. Which goods and services fall under which rate is Revenue’s rates database to define, and it is worth checking directly, since these rates move at budgets.