What Is VAT and How Does It Work for UK Businesses?

VAT (Value Added Tax) is a tax added to most goods and services sold in the UK. Businesses that are VAT registered collect it from their customers and pay it to HMRC, and they can usually reclaim the VAT they pay on their own business costs. You must register once your taxable turnover goes over £90,000 in a rolling 12-month period. Below that, registering is optional.

What Is VAT?

VAT is a tax on spending. It helps fund public services such as the NHS, schools and roads. Customers pay it on most purchases. Businesses collect it on the government's behalf and hand it over to HMRC.

In practice, VAT-registered businesses add VAT to what they sell (output VAT), and subtract the VAT they've paid on business purchases (input VAT). The difference is what they pay to HMRC, or in some cases get back.

What Is the VAT Threshold?

The VAT threshold is the level of taxable turnover at which a business has to register. It's currently £90,000 over a rolling 12-month period. It's reviewed regularly and can change, so check GOV.UK for the current figure.

Some businesses register voluntarily below the threshold, for example to reclaim VAT on their purchases or because they deal with larger clients. For a closer look, see our guide to the VAT threshold.

How Do I Register for VAT?

You register with HMRC, either because you've passed the threshold or because you've chosen to. You'll need details such as your company name and number, your Unique Taxpayer Reference (UTR), your bank details and your taxable turnover. Mistakes or mismatched information can slow things down, so it's worth checking everything before you submit.

Once registered, you receive a VAT number and a certificate. Registration can take a few weeks. If you'd like help with the process, our VAT registration service can assist.

What Are the UK VAT Rates?

Which rate applies depends on what you sell. HMRC lists these on GOV.UK in its guidance on rates of VAT on different goods and services.

How Do I Calculate VAT?

At the 20% standard rate, multiply the price before VAT by 1.20 to add VAT. So £50 becomes £60. To go the other way, divide the VAT-inclusive price by 1.20. Our guide on how to calculate VAT has more examples, including the other rates.

What Is a VAT Number?

A VAT number identifies a VAT-registered business. You'll find yours on your registration certificate. It needs to appear on your invoices and receipts, because incomplete invoices can cause trouble when you file returns. Our post on what a VAT receipt is explains what should be included.

How Can I Check a VAT Number?

It's worth checking a new supplier's VAT number before you pay VAT to them. If the number is invalid and you've paid VAT, HMRC may refuse your reclaim.

You can check UK numbers with the HMRC VAT checker, and EU numbers with the EU VIES tool. Treat unfamiliar numbers with care, especially for large or international deals. Our guide on how to check if a company is VAT registered goes further.

What's the Difference Between Zero-Rated and Exempt?

Zero-rated items are taxable at 0%. Customers pay no VAT, and the business can still reclaim the VAT on its own costs. Examples include most books and children's clothing.

Exempt items are not charged VAT. Examples include some insurance, finance and education services. Businesses that only make exempt supplies generally can't register for VAT or reclaim VAT on their costs, and mixed businesses face partial exemption rules. HMRC's guidance on VAT exemption and partial exemption explains this in full.

How Does VAT Work on Imports and Exports?

Imports. VAT is usually due when goods arrive in the UK. VAT-registered businesses can often account for it on their VAT return through postponed VAT accounting, and then reclaim it as input VAT. See GOV.UK's guidance on import VAT.

Exports. Goods that leave the UK can often be zero-rated, as long as you keep proof of export. The rules on timing and evidence are specific, so read HMRC's guidance on VAT on exports before you rely on it.

Services traded internationally follow different rules, so it's worth checking with HMRC or an accountant.

How Do I Avoid VAT Penalties?

Penalties can follow late returns, late payments and errors. Keeping accurate records and filing early helps, and accounting software can take much of the work out of it. Our guide to VAT return deadlines and penalties explains how they work.

If you later stop needing to be VAT registered, see our guide to deregistering for VAT. If you're comparing schemes, our guide to the flat rate VAT scheme is a good place to start.

What Should I Do Next?

Check your turnover against the threshold, and speak to an accountant if you're unsure whether to register. When you're ready to set up a company, you can compare our formation packages or visit our homepage to see everything we offer.

FAQs

What is the UK VAT registration threshold?

It's £90,000 of taxable turnover over a rolling 12-month period. Registration is required once you pass it, and optional below it.

What are the UK VAT rates?

Standard is 20%, reduced is 5% and zero is 0%. Which one applies depends on what you sell.

What's the difference between zero-rated and exempt?

Zero-rated items are taxable at 0%, and you can reclaim VAT on related costs. Exempt items aren't charged VAT, and the reclaim rules are different.

How do I add VAT to a price?

At the 20% standard rate, multiply the price before VAT by 1.20. To remove VAT, divide the total by 1.20.

Why should I check a supplier's VAT number?

It confirms the supplier is registered and protects you from paying VAT to a false number, which could lead HMRC to refuse your reclaim.

Can I register for VAT before reaching the threshold?

Yes. Some businesses register voluntarily, for example to reclaim VAT on purchases.

This article is for general information only and does not constitute legal, tax or financial advice. VAT thresholds, rates and rules can change, so please check GOV.UK or speak to a qualified accountant before making decisions.