---
title: "VAT"
description: "What is VAT? A tax businesses charge on sales and reclaim on purchases, paying the difference to the tax authority. Learn how it works, with a worked example."
url: https://1flux.ai/glossary/vat
last_updated: 2026-10-11
---

[Accounting](https://1flux.ai/glossary#accounting)

# VAT

What is VAT, and why does a business only pay over the difference?

Glossary Updated 11 October 2026

Definition

Value added tax (VAT) is a consumption tax charged at each stage of supply: businesses charge VAT on their sales, reclaim the VAT paid on their purchases and pay the difference to the tax authority.

## What is VAT in practice?

Each business in a supply chain charges VAT on its sales, reclaims the VAT it paid on its purchases and pays over the difference, so the tax is borne by the final consumer. VAT-registered businesses must issue [tax invoices](https://1flux.ai/glossary/tax-invoice), keep records and file periodic returns. Some supplies, such as many exports, are zero-rated, and some are exempt. Similar taxes elsewhere are called GST, as in India.

One period for a VAT-registered trader

Example

- Output VAT on sales of AED 14,000 at 5%

  AED 700

- Input VAT on purchases of AED 10,000 at 5%

  AED 500

VAT payable

AED 200

Rates and rules are set by each country. The UAE and Saudi Arabia both introduced VAT at 5% on 1 January 2018, and Saudi Arabia raised its rate to 15% from 1 July 2020. The two sides of the return are explained under [input and output VAT](https://1flux.ai/glossary/input-and-output-vat).

In 1flux

1flux country packs seed VAT codes for the UAE (5%) and Saudi Arabia (15%), plus zero-rated, and GST codes for India, applied per line with dated rates. Input and output VAT post to their own accounts, and 1flux prepares VAT returns for the UAE and Saudi Arabia from the VAT already posted. [See 1flux Accounting](https://1flux.ai/products/accounting)

Related

## Keep exploring

### [Input and output VAT](https://1flux.ai/glossary/input-and-output-vat)

VAT paid on purchases, and VAT charged on sales.

### [Tax invoice](https://1flux.ai/glossary/tax-invoice)

The invoice a VAT-registered supplier issues for a taxable sale.

### [Tax registration number](https://1flux.ai/glossary/tax-registration-number)

The number a tax authority gives a VAT-registered business.

### [ERP for the UAE](https://1flux.ai/solutions/uae)

A UAE company set up properly: 5% VAT, TRNs, trade licence, LPOs, GRNs and e-invoicing.

### [ERP for Saudi Arabia](https://1flux.ai/solutions/saudi-arabia)

A Saudi company set up properly: 15% VAT, CR, national address, Arabic quotations and ZATCA e-invoicing.

Last updated 11 October 2026