Small Business Tax Dictionary
VAT (Value Added Tax)
VAT (Value Added Tax) is a consumption tax in the United Kingdom levied on the value added to goods and services at each stage of production or distribution. The standard rate is 20%, with reduced rates available for certain items.
How VAT works
VAT is charged at each stage of the supply chain, but ultimately borne by the end consumer. As a VAT-registered business:
- You charge VAT on taxable sales (output tax)
- You reclaim VAT paid on business purchases (input tax)
- You pay the difference to HMRC — or receive a refund if your input tax exceeds your output tax
VAT rates in the UK
| Rate | Percentage | Applies to | | -------- | ---------- | ---------------------------------------------------------------- | | Standard | 20% | Most goods and services | | Reduced | 5% | Domestic fuel, children's car seats, some energy-saving products | | Zero | 0% | Most food, children's clothing, books, public transport | | Exempt | N/A | Insurance, finance, education, health services |
When do you need to register for VAT?
You must register for VAT if your VAT taxable turnover exceeds the current threshold (£90,000 as of 2024). You can also register voluntarily below this threshold, which may be beneficial if your customers are VAT-registered businesses.
VAT returns
VAT-registered businesses must submit VAT returns (usually quarterly) through HMRC's Making Tax Digital system, reporting output tax, input tax, and the net amount owed or refundable.
Why VAT compliance matters
Understanding and managing VAT is essential for UK business compliance. It impacts pricing, invoicing, reporting practices, and cash flow. Errors in VAT accounting can result in penalties and interest from HMRC.