Value Added Tax
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Value Added Tax rates explained
VAT (Value Added Tax) is a tax added to most goods and services sold in the UK. Different VAT rates apply depending on what you sell, and getting them right is important for staying compliant and avoiding costly mistakes. This guide explains the current UK VAT rates, what they cover, and how businesses charge, reclaim or pay VAT correctly.
What Are VAT Rates?
VAT rates decide how much Value Added Tax is added to goods and services sold in the UK. There are three main rates:
Standard Rate (20%)
The standard VAT rate applies to most goods and services. If you are VAT registered, you must charge this rate unless an exception applies.
Reduced Rate (5%)
Some goods and services qualify for the reduced rate, such as children's car seats, home energy, or certain energy-saving materials.
Zero Rate (0%)
Some items are zero-rated, meaning they are taxable but the rate is 0%. This includes most food, children's clothes, books and newspapers.
Getting Started with VAT Rates
Before you charge or reclaim VAT, it is important to know which rate applies to your products or services. Most businesses use the standard rate of 20%, but some items qualify for the reduced rate or zero rate, and mistakes can lead to underpaying or overpaying HMRC.
Register for VAT
You must register for VAT if your taxable turnover goes over the VAT registration threshold. Once registered, you will charge VAT at the correct rate and submit regular VAT returns.
Keep Good Records
Accurate invoicing and record-keeping are essential for showing which VAT rates you have used and for proving your input tax claims.
Stay Up to Date
VAT rates can change, and certain items might qualify for temporary reduced rates or exemptions. Check HMRC guidance or get advice if you are unsure. Knowing how VAT rates work helps you stay compliant, reclaim VAT correctly and avoid costly errors. Registered businesses charge Value Added Tax (VAT) on their sales. This is known as output VAT, and the sales are referred to as outputs. Similarly, VAT is charged on most goods and services purchased by the business. This is known as input VAT. There are three rates: the standard rate, which applies to most goods and services; a reduced rate for some goods and services, such as home energy; and the zero rate for goods and services such as most food and children’s clothes. Some supplies are exempt from VAT, for example postage stamps and financial and insurance transactions. A business normally has to register for VAT if its taxable turnover goes over the £90,000 registration threshold, measured under HMRC’s rolling 12-month rules.
Rates
Limits
Who Pays the VAT Rates?
VAT is ultimately paid by the end consumer, but businesses registered for VAT act as collectors on behalf of HMRC.
Businesses
You must invest in qualifying unquoted trading companies. You cannot be connected to the company; for example, you generally cannot own more than 30% of the shares or be an employee (although some directors can still qualify).
Consumers
The customer pays VAT as part of the price when they buy goods or services that are VAT-rated. The business passes this VAT on to HMRC through its VAT returns.
Non-Registered Businesses
If your business is not VAT registered, you cannot charge VAT on sales, but you also cannot reclaim VAT on purchases.
Importers
When you import goods into the UK, VAT is usually due at the point of import. Businesses can normally reclaim this if the goods are for business use and they are VAT registered. Understanding who pays VAT and how to manage it helps businesses stay compliant and keeps cash flow under control.
How to Charge and Reclaim VAT
If you are VAT registered, you must charge VAT correctly and reclaim it where allowed, to manage your cash flow and stay compliant with HMRC.
How to Charge VAT
Businesses must determine which VAT rate applies to their goods or services, whether it is the standard, reduced, or zero rate. They must then add the correct amount of VAT to their invoices and clearly state the applicable VAT rate. Proper VAT invoices should also be issued to customers, including the business’s VAT registration number and the total amount of VAT charged.
How to Reclaim VAT
Businesses can reclaim VAT paid on most goods and services used for business purposes, known as input tax. To support the claim, they must keep valid VAT invoices and receipts as evidence of the VAT paid. Businesses should also record input VAT accurately in their accounts and include the relevant amounts when completing their VAT return.
Submit VAT Returns
Businesses must file their VAT returns and pay any VAT due on time, usually on a quarterly basis. If the input VAT paid on business expenses is greater than the output VAT charged to customers, the business can reclaim the difference from HMRC. Charging and reclaiming VAT correctly helps businesses avoid penalties and ensures that they pay only the correct amount of VAT owed.