VAT (Value Added Tax)

Understanding VAT for Businesses

VAT is a consumption tax charged on most goods and services in the UK. The standard rate is 20%, with a reduced rate of 5% on some items (home energy, children’s car seats) and zero rate on essentials (most food, children’s clothing, books). You must register for VAT if your taxable turnover exceeds £90,000 in any 12-month period.

Once registered, you charge VAT on your sales and can reclaim VAT on business purchases. The difference is paid to (or reclaimed from) HMRC, typically quarterly. The Flat Rate Scheme simplifies this for small businesses by applying a fixed percentage to total turnover.

VAT does not directly affect your take home pay as an employee, but it impacts the cost of goods and services you buy. Self-employed workers and limited company directors should understand VAT thresholds, as crossing them adds administrative obligations. See our VAT calculator.

How Vat Works in Practice

Value Added Tax (VAT) is a consumption tax charged on most goods and services in the UK. The standard rate is 20%, with a reduced rate of 5% on some items (home energy, child car seats) and a zero rate on essentials (most food, children's clothing, books). Businesses with turnover above £90,000 must register for VAT.

Practical Tips

While VAT is a business tax rather than an income tax, it affects everyone through the prices they pay. Self-employed workers and business owners need to register for VAT when turnover exceeds £90,000. The flat-rate VAT scheme simplifies accounting for small businesses by applying a fixed percentage based on industry type. Voluntary VAT registration below the threshold can be beneficial if your customers are VAT-registered (they can reclaim the VAT you charge). See VAT calculator.

Related Topics

VAT-registered businesses charge VAT on their invoices and reclaim VAT on their purchases. The difference is paid to (or refunded by) HMRC. VAT returns are typically filed quarterly through Making Tax Digital.