Introduction to VAT

VAT is a tax that’s charged on most goods and services that VAT-registered businesses provide in the UK. It’s also charged on goods and some services that are imported from countries outside the European Union (EU), and brought into the UK from other EU countries.

VAT is charged when a VAT-registered business sells to either another business or to a non-business customer.

When a VAT-registered business buys goods or services they can generally reclaim the VAT they have paid.

There are three rates of VAT, depending on the goods or services the business provides. The rates are:

standard – 20 per cent
reduced – 5 per cent
zero – 0 per cent

There are also some goods and services that are:

exempt from VAT
outside the UK VAT system altogether

This guide explains the basics of how VAT works. It tells you where you can find more information and advice.

What is VAT?

VAT is a tax that’s charged on most business transactions in the UK. Businesses add VAT to the price they charge when they provide goods and services to:

business customers – for example, a clothing manufacturer adds VAT to the prices they charge a clothes shop
non-business customers – members of the public or ‘consumers’ – for example, a hairdressing salon includes VAT in the prices they charge members of the public

If you’re a VAT-registered business, in most cases you:

charge VAT on the goods and services you provide
reclaim the VAT you pay when you buy goods and services for your business

If you are not VAT-registered then you cannot reclaim the VAT you pay when you purchase goods and services.

Who charges VAT and what VAT is charged on

VAT-registered businesses add VAT to the sale price of most goods and services they provide.

When you must register for VAT

If you’re a business and the goods or services you provide count as what’s known as ‘taxable supplies’ (see ‘What is VAT charged on?’ below) you’ll have to register for VAT if either:

your turnover for the previous 12 months has gone over a specific limit – called the ‘VAT threshold’ (currently £77,000)
you think your turnover will soon go over this limit

You can choose to register for VAT if you want, even if you don’t have to.

How and when to register for VAT

What is VAT charged on?

If you’re VAT-registered, you’ll have to charge VAT on any goods and services that you provide in the UK that are VAT taxable. You charge VAT on the full sale price, even if you accept goods in part exchange or through barter instead of money. You can find more information about goods and services on which you have to charge VAT in the guide below.

Goods and services where you have to charge VAT

How VAT is charged and accounted for

If you’re VAT-registered, the VAT you add to the sale price of your goods or services is called your ‘output tax’. The VAT you pay when you buy goods and services for your business is called your ‘input tax’.

Filling in your VAT Return

If you’re VAT-registered you’ll have to submit a VAT Return at regular intervals – usually quarterly – and send it to HM Revenue & Customs (HMRC). The return shows:

the VAT you have charged on your sales to your customers in the period – known as output tax
the VAT you have paid on your purchases – known as input tax

If the amount of output tax is more than the input tax, then you send the difference to HMRC with your return.

If the input tax is more than your output tax, you claim the difference back from HMRC.

There are special schemes that some businesses can use to help them work out and pay their VAT.

You can read about VAT Returns, payments and repayments, VAT accounting schemes and VAT online services in our guides below.

Managing your VAT

How to submit your VAT Return online

VAT accounting schemes: the basics

Rates of VAT

There are different VAT rates, depending on the goods or services that are being provided. Currently there are three rates:

standard rate – 20 per cent
reduced rate – 5 per cent
zero rate – 0 per cent

The standard rate of VAT is the default rate – this is the rate that’s charged on most goods and services in the UK unless they’re specifically identified as being reduced or zero-rated.

Examples of reduced-rated items

These are some examples of goods and services that may be reduced-rated, depending on the product itself and the circumstances of the sale:

domestic fuel and power
installing energy-saving materials
sanitary hygiene products
children’s car seats

This isn’t a complete list of reduced-rated items and services.

Examples of zero-rated items

These are examples of goods and services that may be zero-rated, depending on the product itself and the circumstances of the sale:

food – but not meals in restaurants or hot takeaways
books and newspapers
children’s clothes and shoes
public transport

This isn’t a full list of zero-rated items.

You can read an explanation of different VAT rates and find out what rates apply to different goods and services in our related guides below.

VAT rates explained: standard, reduced, zero, exempt

Goods and services where you have to charge VAT

Items not covered by VAT

There are some items that aren’t covered by VAT. These items are either:

exempt
outside the scope of VAT

Exempt items

Some items are exempt from VAT because the law says they mustn’t have any VAT charged on them. Items that are exempt include the following:

insurance
providing credit
education and training, if certain conditions are met
fundraising events by charities, if certain conditions are met
membership subscriptions, if certain conditions are met
most services provided by doctors and dentists

Selling, leasing and letting of commercial land and buildings are also exempt from VAT.

But you can choose – or ‘opt’ – to give up the right to the exemption and to charge VAT at the standard rate instead. This allows you to reclaim input tax when otherwise you wouldn’t be able to. For more information, see the page in this guide on the difference between exempt and zero-rated.

Find out about VAT exemptions for education in VAT Notice 701/30 on the HM Revenue & Customs (HMRC) website- Opens in a new window

How VAT applies to fundraising events

Find out about opting to tax land and buildings in VAT Notice 742A on the HMRC website- Opens in a new window

Outside the scope of VAT

There are some things that aren’t in the UK VAT system at all – they’re outside the scope of VAT. They are not taxable supplies and no VAT is charged on them. Items that are outside the scope of VAT include:

non-business activities like a hobby – for example, you might sell some stamps from your collection
fees that are fixed by law – known as ‘statutory fees’ – for example the congestion charge or vehicle MOT tests

The difference between exempt and zero-rated

If you sell zero-rated goods or services, they count as taxable supplies, but you don’t add any VAT to your selling price because the VAT rate is 0 per cent.

If you sell goods or services that are exempt, you don’t charge any VAT and they’re not taxable supplies. This means that you won’t normally be able to reclaim any of the VAT on your expenses.

Generally, you can’t register for VAT or reclaim the VAT on your purchases if you sell only exempt goods or services. If you sell some exempt goods or services you may not be able to reclaim the VAT on all of your purchases.

If you buy and sell only – or mainly – zero-rated goods or services you can apply to HM Revenue & Customs to be exempt from registering for VAT. This could make sense if you pay little or no VAT on your purchases. You can find out how to apply for exemption from registration, get details of exempt and partly exempt goods and services and check the rates of VAT and how they apply to different goods and services in our guides below.

When to register for UK VAT

Exempt and partially-exempt businesses for VAT purposes

VAT rates explained: standard, reduced, zero, exempt

Rates of VAT on different goods and services

Find out more about VAT

There is a range of general guidance on VAT in this section of the website including:

how and when to register for VAT
VAT thresholds, fuel scale charges and exchange rates
VAT rates on different goods and services
online VAT Returns
accounting schemes
payments and refunds
links to downloadable forms, guidance and notices

VAT Helpline

If you cannot find the answer to your question on the HM Revenue & Customs (HMRC) website, the easiest way is to ring the VAT Helpline where you can get most of your VAT questions answered.

Before you ring, make sure you have your VAT registration number and postcode to hand. If you’re not VAT-registered, you’ll need your postcode – it’s necessary so HMRC can keep a record of your call.

It’s not always possible to answer your question straightaway over the telephone because the helpline adviser may need to research the answer. If this happens, they’ll take your details and call you back as soon as possible. The helpline adviser will tell you how long it will take.

In some cases, HMRC might need you to write in, especially if they need to look at your paperwork. The helpline adviser will tell you if this needs to happen and where you need to write to.

Find contact details for the VAT Helpline on the HMRC website- Opens in a new window

Business Advice Open Days

Business Advice Open Days are popular events designed especially for small and medium-sized businesses and they take place in different locations around the UK. It’s not just HMRC at these events – there are other government departments as well, like the Department for Work and Pensions, the Health & Safety Executive and the Intellectual Property Office.

It’s an opportunity to talk to experts and get all your questions answered in one place on the same day. You can:

book a one-to-one session with a VAT adviser
attend seminars about making VAT easier
learn how to do tax online
get help with marketing, funding and business planning
get tips on how to make your business grow

Business Advice Open Days

VAT glossary

These are some plain English definitions of common VAT terms that HM Revenue & Customs (HMRC) uses:

accounting period: see tax period
acquisitions: goods brought into the UK from other EU countries – (goods brought into the UK from outside of the EU are known as Imports)
corporate body: an incorporated body such as a limited company, limited liability partnership, friendly, industrial or provident society
distance sales: where a business in one EU country sells and ships goods directly to consumers in another EU country, eg internet or mail-order sales
exports: goods sent to a non-EU country
despatches: goods sent to another EU country
imports: goods brought into the EU from another country
input tax: the VAT you pay on your purchases
output tax: the VAT you charge on your sales
place of supply: the country in which a supply of goods or services must be accounted for VAT purposes
self-billing: your customer issues your VAT invoice and sends a copy to you with their payment
supply: selling or otherwise providing goods or services, including barter and some free provision
supply of goods: when exclusive ownership of goods passes from one person to another
taxable person: any business entity that buys or sells goods or services and is required to be registered for VAT – this includes individuals, partnerships, companies, clubs, associations and charities
taxable supplies: all goods and services sold or otherwise supplied by a taxable person which are liable to VAT at the standard, reduced or zero rate
taxable turnover: the total value – excluding VAT – of the taxable supplies you make in the UK (excludes capital items like buildings, equipment, vehicles or exempt supplies)
tax period: the period of time covered by your VAT return, usually quarterly
tax point: the date when VAT has to be accounted for – for goods, this is usually when you send the goods to a customer or when they take them away, for services, this is usually when the service is performed
time of supply: see tax point

CASE STUDY

Here’s how I got to grips with VAT

Based in London, Harley Street Cosmetic is a range of innovative plant-based skincare products and natural perfumes, developed by the company’s founder and owner, Dr Cuross Bakhtiar. From the start, Cuross was determined to keep a close eye on the business’ finances. Here he talks about why he decided to register for VAT early, the importance of setting up an effective record-keeping system and what to consider when choosing a software package.

WHAT I DID

Gather information

“While my background and core skills lie in medical research, plant chemistry and product development, I also wanted to understand and control the operational side of things, especially the finances. One area I knew I had to get to grips with was VAT.

“I attended two of HMRC’s VAT workshops, which were very beneficial, not least because I was able to talk to other business owners about how they approach VAT and pick up useful tips. The workshops also proved to be an unexpectedly good networking exercise!

“There’s plenty of guidance available online if you know where to look.”

Decide which VAT scheme to use

“I decided early on that the company should voluntarily register for VAT, rather than waiting until the turnover made it compulsory. One advantage of this was that we could reclaim some of the input tax (the VAT charged on purchases made by the company), which I had calculated could be a considerable amount. Another advantage of being VAT registered is that it helps project a professional image, which is important in the cosmetics industry because many people are wary of newcomers.

See our guide on when to register for UK VAT.

“We sell our products direct to the consumer, so I considered the various VAT retail schemes, which provide an alternative to traditional VAT accounting rules. However, I decided against using one.

Set up a record-keeping system

“If you want to keep on top of the VAT, good record-keeping is essential. I bought in computer software, recommended by a former colleague, to streamline the process.

“It certainly made filing my first VAT return easier, as it generates a VAT summary and all the other figures required by HMRC.

“I try to enter things into the system as soon as possible to ensure that nothing’s overlooked and that any management information generated is as accurate and up to date as possible. Having a good system also makes it easier to tackle the more complex areas of VAT. For example, the natural oils we use have different VAT treatments according to whether they are classified as a raw material or a food product by HMRC. That’s a lot easier to manage when I can see all the figures at a glance.”

WHAT I’D DO DIFFERENTLY

Use the same software package as the accountants

“Computerising the VAT accounts has been a huge benefit, but looking back, it would have been better to buy the same software that our accountants use. Even if you do the day-to-day bookkeeping yourself, you may have to send it to your accountant at some point, and using the same software makes it easier to transfer information.”

Table of Contents

What is VAT?