Value Added Tax (VAT) is a consumption tax levied on most goods and services sold in the United Kingdom. HM Revenue & Customs (HMRC) administers VAT under UK law. There are three main VAT rates:
20% The standard rate of 20% applies to most goods and services, including electronics, clothing, professional services, and general retail purchases. This is the default VAT rate used in the calculator above.
5% A reduced rate of 5% applies to certain goods and services such as domestic fuel and power (gas, electricity, heating oil), children's car seats, and home energy-saving installations. Select 5% from the rate dropdown in the calculator to use this rate.
0% Zero-rated items are still VAT-taxable but at 0%. This includes most food and drink (but not restaurant meals or hot takeaways), children's clothing and footwear, books and newspapers, public transport, and prescription medicines. Businesses selling zero-rated goods must still register for VAT if their turnover exceeds the threshold.
Exempt Some goods and services are entirely exempt from VAT, meaning no VAT is charged and input VAT cannot be reclaimed. Examples include insurance, postal services, education and training, health services, and certain financial transactions.
The UK VAT registration threshold is £90,000 in taxable turnover over a rolling 12-month period. If your business's total VAT-taxable turnover exceeds this amount, you must register for VAT with HMRC.
Key points to remember:
Making Tax Digital (MTD) is a government initiative requiring VAT-registered businesses to keep digital records and submit VAT Returns using compatible software. Since November 2022, all VAT-registered businesses, regardless of turnover, must comply with MTD for VAT.
Popular MTD-compatible software packages include Xero, QuickBooks, Sage, FreeAgent, and many others listed on HMRC's website.
A VAT Return is a form submitted to HMRC, usually every three months (quarterly), detailing how much VAT you have charged your customers and how much VAT you have paid on business purchases.
Small businesses with turnover under £150,000 (excluding VAT) may use the VAT Flat Rate Scheme. Instead of calculating input and output VAT separately, you pay a fixed percentage of your turnover to HMRC and keep the difference. This simplifies bookkeeping and may be financially beneficial depending on your trade sector.