Value Added Tax Guide

What is value-added tax?

Value Added Tax (VAT) is a consumption tax charged on most goods and services in the UK, collected by businesses. With over £100 billion collected annually, VAT is the third-largest source of national revenue.

VAT collection follows a three-stage process. Businesses charge VAT to customers, pay VAT on their own purchases, and send only the difference to HMRC. In the end, consumers carry the actual cost, while businesses simply pass the tax along.

What are the different UK VAT rates and what do they apply to?

A VAT rate is the percentage of VAT tax charged on a good or service. The UK operates a three-tier rate system, with each rate reflecting the extent to which the government considers a good or service to be essential. Essential goods are charged at a lower rate, while non-essential items are charged at a higher rate.

20% Standard Rate

The standard VAT rate applies to most goods and services, including electronics, furniture, restaurant meals, and professional services. It has remained at 20% since 2011, following an increase from 17.5%. From 2025, private school fees are also subject to this rate, marking the end of their long-standing exemption.

5% Reduced Rate

The reduced VAT rate of 5% applies to essential goods and services that support public welfare. Domestic electricity, gas, and heating oil are taxed at this lower rate to help households manage energy costs and ease the cost of living. It also covers children’s car seats, mobility aids for older or disabled people, and specific energy-saving installations. This reduced rate reflects the government’s recognition that these items are vital for safety, accessibility, and everyday comfort.

Zero-Rated Goods

The zero VAT rate is intended to ease the cost of living and is often used by the government as both a policy incentive and a social support measure. It applies to most food for human consumption, including meat, fish, vegetables, fruit, bread, and milk, although certain items such as confectionery, crisps, hot takeaway meals, and alcoholic drinks are excluded. Children’s clothing and footwear (typically up to ages 13 or 14) are also zero-rated to help families manage everyday expenses. In addition, books, newspapers, magazines, and prescription medicines qualify for this rate. Public transport and new residential buildings are likewise zero-rated to keep essential goods and services affordable for the broader population.

VAT-Exempt

Some goods and services are exempt from VAT, which means no tax is charged, and businesses cannot reclaim VAT on related expenses. This category includes financial services, insurance, medical care provided by registered professionals, most property sales and residential rentals, and education delivered by eligible institutions. Burial and cremation services, betting and gaming, and most postal services are also VAT-exempt. Exemptions apply when goods or services fall outside the scope of UK VAT or qualify for a specific exemption under HMRC regulations.

What is the £90,000 VAT threshold?

The VAT registration threshold is the taxable turnover level at which a business must register for VAT. As of April 1, 2024, it is set at £90,000, up from £85,000.

Any business whose taxable turnover exceeds £90,000 over a rolling 12-month period must register within 30 days, while those expecting to exceed the limit in the next month must register immediately. The increase helps smaller businesses stay outside the VAT system, reducing their administrative and compliance costs.

Businesses below the £90,000 threshold can still choose voluntary VAT registration if they want to reclaim VAT on eligible business costs or improve their credibility with VAT-registered clients.

What does getting VAT registered mean, and how do you receive your VAT number?

When your business becomes VAT registered, HMRC assigns you a unique VAT registration number. UK VAT numbers begin with the prefix “GB”, followed by nine digits (or twelve for specific entities). This number must appear on all VAT invoices, your website, and business correspondence. Your VAT number acts as official proof that your business is authorised to charge VAT on sales and reclaim VAT on eligible purchases, confirming your compliance with HMRC’s VAT regulations.

If you need to verify another business before paying a VAT invoice, knowing how to find a VAT number helps you check whether the number matches the company name and trading details.

How to Charge VAT: Invoicing and Collection Requirements

Most goods and services you sell are subject to VAT at the standard 20% rate unless specifically reduced, zero-rated, or exempt. You must charge VAT on all taxable supplies once registered and add the appropriate percentage to your selling price when invoicing your clients.

VAT invoices must include the following information:

• Your business name and address
• Customer details
• A unique invoice number
• The date of supply
• A description of the goods or services
• The amount excluding VAT
• The VAT rate applied
• The total VAT charged
• The total amount, including VAT

Simplified invoices work for transactions under £250, requiring less detail but still showing the total VAT.