VAT is one of those taxes that trips up small business owners and sole traders more than almost anything else. Whether you're trying to work out if a price includes VAT, deciding whether to register voluntarily, or understanding what you can reclaim — this guide covers it plainly.
| Rate | % | Applies to |
|---|---|---|
| Standard rate | 20% | Most goods and services — electronics, clothing, professional services, alcohol, furniture |
| Reduced rate | 5% | Domestic energy (gas, electricity), children's car seats, some renovation work, mobility aids |
| Zero rate | 0% | Most food, children's clothing, books, newspapers, most medical equipment, public transport |
| Exempt | N/A | Financial services, insurance, education, health services, land and property (in most cases) |
Zero-rated and exempt sound similar but are different. Zero-rated means VAT applies at 0% — the business still has to account for it and can reclaim input VAT on costs. Exempt means VAT doesn't apply at all — and the business generally can't reclaim VAT on related costs.
You must register for VAT when your taxable turnover exceeds £90,000 in any rolling 12-month period — not a tax year, but any consecutive 12 months. Once you hit that threshold you have 30 days to notify HMRC and register. Failure to register on time results in penalties.
You can also register voluntarily below the threshold. This is worth considering if your customers are VAT-registered businesses (they can reclaim the VAT you charge, so it doesn't cost them more) and you have significant VAT-able expenses you want to reclaim.
Once VAT registered, you can reclaim the VAT element on business purchases — known as input VAT. This includes equipment, software, professional services, office supplies, business travel and most other genuine business costs. You cannot reclaim VAT on business entertainment, personal purchases, or costs that relate to exempt supplies.
VAT returns are typically submitted quarterly via HMRC's Making Tax Digital platform. You report VAT collected on sales (output VAT) minus VAT reclaimed on purchases (input VAT). If input VAT exceeds output VAT — common for businesses with high costs — HMRC repays the difference.
Small businesses with taxable turnover below £150,000 can use HMRC's Flat Rate Scheme. Instead of tracking VAT on every transaction, you pay a fixed percentage of your gross turnover to HMRC. The rate varies by business sector — from 4% for retailers to 14.5% for management consultants. You keep the difference between what you charge customers (20%) and what you pay HMRC (your flat rate). You cannot reclaim input VAT on purchases under this scheme, so it suits businesses with low costs.
Multiply by 1.2. A price of £250 ex-VAT becomes £250 × 1.2 = £300 including VAT. The VAT element is £50.
Divide by 1.2. A VAT-inclusive price of £360 ÷ 1.2 = £300 ex-VAT. The VAT element was £60. A common mistake is subtracting 20% — that gives the wrong answer because 20% of the inclusive price is not the same as 20% of the exclusive price.
£90,000 of taxable turnover in any rolling 12-month period. This threshold has been frozen for several years. Once exceeded, you have 30 days to register with HMRC.
No — and you must not. Only VAT-registered businesses are permitted to charge VAT and issue VAT invoices. Charging VAT without being registered is a criminal offence. If you're not registered, your prices are VAT-free regardless of whether your customers are VAT-registered businesses.
Not exactly. VAT is collected at every stage of the supply chain, with each business reclaiming the VAT paid to its suppliers. Sales tax (common in the US) is only charged at the final point of sale to the consumer. The end cost to the consumer can be similar, but the administration is different — VAT involves more frequent reporting and reclaiming throughout the chain.
You must register within 30 days and account for VAT from the date you exceeded the threshold. HMRC can assess VAT going back to when you should have been registered and charge interest and penalties on any VAT you should have collected. If you're approaching the threshold, monitor it closely each month — not just at year end.