VAT: the basics

VAT is a tax that is charged on some goods and services. You may have to register for VAT with HM Revenue & Customs if your turnover is more than £81,000 per year.

Guide

3 min read

1. Overview

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.

2. Charging VAT

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

When you must register for VAT

You may 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 £81,000)
  • 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.

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.

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.

3. VAT rates

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

Reduced-rated items

Goods and services that may be reduced-rated include:

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

Zero-rated items

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.

Goods and services that may be zero-rated include:

  • food - but not meals in restaurants or hot takeaways
  • books and newspapers
  • children's clothes and shoes
  • public transport

Exempt items

Some items are exempt from VAT, including:

  • 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 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.

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. These 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

Read about Self Assessment: the basics.

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