What Is VAT?
VAT (Value Added Tax) is charged on most goods and services in the UK. Learn the rates, registration thresholds, and how to account for it.
Key Takeaways
- You must register for VAT when taxable turnover exceeds £90,000 in any 12-month period
- The standard VAT rate is 20%; reduced rate is 5%; some goods are zero-rated
- VAT-registered businesses collect VAT from customers and pay it to HMRC minus VAT paid on purchases
- Making Tax Digital requires VAT returns to be filed using compatible software
What VAT is
Value Added Tax is a consumption tax added to the price of goods and services. VAT-registered businesses charge VAT on their sales (output VAT), deduct VAT paid on purchases (input VAT), and pay the difference to HMRC. If input VAT exceeds output VAT — common for a new business with large startup purchases — HMRC refunds the difference.
Registration threshold and rates
You must register for VAT once taxable turnover in any rolling 12 months exceeds £90,000. Voluntary registration below the threshold is useful if your customers are mainly VAT-registered businesses. The standard rate is 20%. The reduced rate of 5% applies to home energy and some medical supplies. Zero-rated items include most food, children's clothing, books, and public transport — businesses can still reclaim input VAT on costs related to zero-rated supplies.
Filing VAT returns
VAT-registered businesses file returns quarterly (monthly or annual schemes are available). The return reports output and input VAT for the period, with the difference paid to or reclaimed from HMRC. Returns must be filed and payment made within 1 month and 7 days of the period end. Late payment incurs a penalty points system leading to £200 fines plus daily interest on overdue amounts.
Making Tax Digital for VAT
Since April 2022, all VAT-registered businesses must keep digital VAT records and file returns using Making Tax Digital-compatible software. You cannot manually enter figures on the HMRC website — submissions must come from accounting software (Xero, QuickBooks, Sage, FreeAgent) that connects directly to HMRC. Bridging software exists for businesses that keep records in spreadsheets.
VAT schemes for smaller businesses
The Flat Rate Scheme charges a fixed percentage of gross turnover rather than tracking input and output VAT separately — simpler to administer but may not always be financially advantageous. The Cash Accounting Scheme lets you account for VAT when cash is received or paid rather than when invoices are issued. The Annual Accounting Scheme allows one VAT return per year with advance payments — simpler administration.