UK VAT Explained: Rates, Registration, and How VAT Is Calculated

Value Added Tax is the tax on most goods and services sold in the United Kingdom, charged at each stage of the supply chain and ultimately paid by the final consumer. Businesses that are VAT-registered charge it on their sales, reclaim it on their purchases, and pay HMRC the difference. The system has three rates, a registration threshold, and a distinction — between zero-rated and exempt — that decides whether a business can reclaim its own VAT. This guide explains the rates, the threshold, the arithmetic of adding and removing VAT, and the schemes that simplify the accounting, in pounds, with the 2026 position verified. It is general information, not tax advice, and a business with a complex position should take professional advice.

The three rates, and exempt

The standard rate of 20% is the default. It applies to most goods and services unless the law specifically puts them in another category: adult clothing, electronics, restaurant meals, professional services, and most consumer goods are standard-rated. The reduced rate of 5% applies to a short, specific list: domestic fuel and power, children’s car seats, smoking-cessation products, and certain energy-saving materials installed in homes, among others. The zero rate of 0% applies to a longer list of essentials and specified items: most food, children’s clothing and footwear, books and newspapers, and public transport.

Zero-rated and exempt are different, and the difference is about reclaiming VAT. A zero-rated supply is taxable, but at 0%: the business charges no VAT, and it can still reclaim the VAT it paid on its own purchases. An exempt supply is outside the VAT system: the business charges no VAT, and it cannot reclaim the VAT on its purchases relating to that supply. A bookseller, zero-rated, reclaims input VAT. A bank, exempt, does not. The distinction is worth real money, and it is the reason the classification of a supply matters beyond the rate printed on the invoice.

Classification is a matter of law and HMRC guidance, and borderline cases are common: a cold takeaway sandwich is zero-rated, a hot one is standard-rated; a book is zero-rated, an ebook is zero-rated too, but a digital service that is not a book is not. The HMRC guidance on VAT rates for different goods and services is the authority, and a business that classifies a supply wrongly can owe the difference, with penalties, for the whole period. When a supply sits on a boundary, the guidance — or professional advice — should be consulted before the first invoice, not after the first return.

Try the method on your own figures with the UK VAT Calculator.

Registration: the threshold, the tests, and voluntary registration

The registration threshold is £90,000 of taxable turnover in any rolling 12-month period, in force since 1 April 2024. Taxable turnover means the value of taxable supplies — standard, reduced, and zero-rated — excluding VAT itself and excluding exempt supplies. The test is rolling, not annual: at the end of each month, add the last 12 months, and if the total exceeds £90,000, registration is compulsory. There is also a forward-looking test: if taxable turnover is expected to exceed £90,000 in the next 30 days alone, registration is compulsory on that expectation.

Once the threshold is crossed, the business must notify HMRC within 30 days of the end of the month in which it was crossed, and registration takes effect from the first day of the second month after crossing, or from the date the forward-looking test was met. Late registration brings penalties based on the VAT owed from the date registration was due. Deregistration is possible when taxable turnover falls below £88,000, the deregistration threshold, and it must be applied for — it does not happen automatically.

Voluntary registration below the threshold is allowed, and it is common where the business sells mainly to other VAT-registered businesses, who reclaim the VAT charged, and where reclaiming input VAT exceeds the cost of compliance. It is rarely worthwhile where the customers are consumers, because the business must add 20% to its prices with no one to reclaim it, and it becomes more expensive than an unregistered competitor. Non-UK businesses have no threshold at all: they must register from their first taxable sale in the UK, or when they expect one within 30 days.

Adding and removing VAT

The arithmetic is two multiplications, and the common error is doing the second one wrong. To add VAT to a net price, multiply by 1 plus the rate: by 1.20 at the standard rate, by 1.05 at the reduced rate. A net price of £100 at 20% becomes £120 gross, with £20 of VAT. To remove VAT from a gross price, divide by the same factor: £120 divided by 1.20 is £100 net, and the VAT is £20. Dividing £120 by 20 gives £6, which is not the VAT by any definition, and it is the error that appears most often in invoices and quotations.

Worked examples at the standard rate: a net price of £250 becomes £300 gross, with £50 of VAT. A gross price of £600 is £500 net, with £100 of VAT. At the reduced rate: a net price of £200 becomes £210 gross, with £10 of VAT. A business that buys at £100 net and sells at £200 net, both standard-rated, charges £40 of VAT on the sale, reclaims £20 on the purchase, and pays HMRC £20 — the VAT on the £100 of value it added. That is the whole mechanism of the tax, in one transaction.

Prices quoted to consumers must include VAT where it applies, and the VAT must be shown on a VAT invoice for a VAT-registered customer who needs to reclaim it. A price quoted as net, with VAT to be added, must say so plainly, or the customer is entitled to assume the quoted price is the price to pay. The invoice must show the supplier’s VAT number, the rate, and the VAT amount, and it must be issued within 30 days of the supply for retail sales unless the customer asks for one.

Returns, Making Tax Digital, and the flat-rate scheme

VAT returns are usually quarterly, and since April 2026 all VAT-registered businesses must keep digital records and submit returns through Making Tax Digital compatible software. The return reports output VAT charged on sales, input VAT reclaimed on purchases, and the difference, paid to or reclaimed from HMRC. The deadline is one calendar month and seven days after the end of the return period, and late filing and late payment bring penalties under the points-based system.

The flat-rate scheme simplifies the accounting for small businesses with expected taxable turnover of £150,000 or less. Instead of accounting for input and output VAT separately, the business charges VAT as normal, pays HMRC a fixed percentage of its gross turnover — set by its trade, for example 14.5% for IT consultancy, with a 16.5% rate for limited-cost traders — and keeps the difference. In the first year of registration, 1% is deducted from the applicable rate. The scheme saves record-keeping, but it can cost money where input VAT is high, and it should be compared with the standard scheme on the business’s own figures before joining.

Other schemes exist for specific cases: the annual accounting scheme, with one return a year and monthly payments; the cash accounting scheme, where VAT is accounted for when paid rather than when invoiced, for businesses with turnover up to £1.35 million; and margin schemes for second-hand goods, where VAT is charged on the margin rather than the full price. Each has conditions and limits, and the choice should be made on the business’s cash flow and customer mix, not on the scheme’s headline simplicity.

Mistakes: classification, threshold, and the borderline

The costliest mistake is misclassification: charging 0% on a standard-rated supply, or 20% on a zero-rated one, for a whole period. The first owes HMRC the difference, with interest and possibly penalties, and cannot usually recover it from customers after the event. The second overcharges customers and, if the business reclaims input VAT it should not have, owes that too. Classification should be checked when a new product or service is introduced, against the HMRC guidance, and documented.

The second mistake is missing the threshold. A business that grows past £90,000 without noticing owes VAT from the date registration was due, and the liability includes the VAT on sales made while unregistered, which cannot be recovered from customers who were charged no VAT. Monitoring rolling turnover monthly, as the test requires, is the only reliable prevention. The third mistake is treating exempt and zero-rated as the same: a business with exempt supplies that reclaims all its input VAT will owe the excess, and a business with zero-rated supplies that fails to reclaim it will overpay.

Finally, keep records. VAT records must be kept for at least six years, digitally under Making Tax Digital, and they must support every figure on every return. A return that cannot be evidenced is a return that cannot be defended, and the evidence is cheapest to keep at the time of the transaction, not to reconstruct at the time of an enquiry.

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