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The British government has come under fire for its New Year’s resolution to raise the Value-Added Tax (VAT) from 17.5% to an all-time high of 20%. The decision comes after a slew of European countries, like Spain and Greece, also imposed increases in the VAT, a federal sales tax.

For travellers, this means higher prices on pretty much everything, said Reid Bramblett, author of ReidGuides, a trip-planning website dedicated to European travel. But in some cases, tourists can receive VAT refunds, he explained. For those of us less familiar with the VAT, Bramblett helped Travelwise tackle a few common questions about this ubiquitous consumption tax.

Q: How does the Value-Added Tax (VAT) work?

A: Well, unlike in the United States, where [sales] taxes are added by each state and they show up at the cash register on the price tag, in much of the rest of the world, the tax is imposed by the federal government and included in the price tag. I think in a lot of ways, psychologically, [the government] can charge much higher taxes because people don't see them. If you're travelling in Europe, it's usually around 20 percent these days, in a lot of places. And it's been going up in the last couple years with the financial crisis.

Q: What kinds of products should tourists expect to pay the VAT on?

A: Everything. The exceptions are things the tourist is not going to run into. It's like, when you buy farm equipment, you're not going to pay the VAT. On most everyday items, there's the VAT and it's included, whether it's a guide to a museum or a hotel room or a restaurant.

As the VAT has gone up, some places have raised their prices and some places have maintained prices and just kept a smaller sliver [of profits]. The government is trying to increase revenue and force wages down by forcing prices up. The euro was a great idea when the economy was booming. Now that it's not, it's become this horrible albatross for European countries, obviously with the UK as an exception.

Q: Can you give some examples of the most recent VAT increases?

A: There were a lot of increases in 2010. Greece went up twice last year [landing at 23%]. A couple are going up this year or just went up, like England. Portugal and Poland just went up to 23% in January. But [most of the recent increases are] in places like Latvia -- not common tourist destinations.

Q: How do the increases vary from country to country?

A: Some places' taxes have jumped a lot. Greece jumped from 19% to 21% to 23%. Hungry had already jumped twice by 2009 and now I think it's at 25%, around the highest in Europe. But still, I lived in Budapest a few months ago and the prices were so low that it didn't really matter. The fact that the UK is going up to 20% puts it more on par with other popular European destinations - its competitors [tourism-wise]. I think the real issue for [travellers] is the continued relative strength of the pound. It's no longer a punishing 2 to 1, but it's still about 1.6 dollars to the pound, and it's compounded by the high sticker prices.

Like Greece, Ireland and Spain and all the countries you hear about in the news that have had financial problems, their VATs have gone up.

Note: A list of current VAT rates can be found at the website for the TMF Group, an independent international accounting firm.

Q: How can folks travelling on a budget prepare themselves for VAT increases?

A: The ways to save money on travel remain the same. Look for alternative lodgings, [since accommodations] are big-ticket travel items. For example, you can stay in a castle on the Rhine River. People go to the Rhine to look at castles and then they spend maybe 120 euros in a little tourist-class hotel. But, the castles will often [rent out] rooms and charge something like 80 euros. And then you get to stay in a castle! How cool is that?

Overall, however, I have seen prices come down in the past couple years in Europe. No one will admit it, but I know because I keep track of things like the plate of spaghetti in a particular restaurant. Over the last year-and-a-half, I have found myself luckily being able to downgrade hotels that used to be in the moderate price range. If they were like 100 or 120 euros a few years ago, they might be 80 to 100 euros now.

Q: What about VAT refunds? When can tourists file for tax refunds?

A: VAT refunds are primarily useful for large shopping purchases. You usually have to spend a certain amount of money in one place in order to get a refund. [O]ften between $150 and $200. [Refunds are not applicable to hotel stays.]

When it really comes into play is when you're buying either a really expensive item or a whole lot of moderately priced items. Technically, the VAT is only supposed to be charged to citizens. They're not supposed to charge it to non-citizens, for the most part. But, because it would be such a pain-in-the-neck of paperwork, they put these thresholds that you have to reach in order to give you a refund.

Note: Detailed information on how to file for a VAT refund can be found at this guide from Rick Steves' Europe.



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