UK VAT Rate: All You Need to Know

In short: The standard UK VAT rate is 20% and applies to most goods and services. A reduced rate of 5% covers items such as children’s car seats. A zero rate of 0% covers most foodstuffs, books, newspapers, and children’s clothing. VAT-registered businesses charge these rates and report VAT to HMRC.

Understanding the UK Value Added Tax (VAT) system, including the UK VAT rate, is vital for businesses and consumers alike. With different rates and exemptions, it’s easy to get lost in the details.

That's why we've put together this guide. It explains the UK VAT system and gives you the information you need to navigate it with confidence.

When was VAT introduced in the UK?

VAT was introduced in the UK in 1973, when it replaced the Purchase Tax. Value Added Tax (VAT) is a form of consumption tax, and it still applies in the UK today.

The first VAT rate, set by the Conservative Chancellor Lord Barber, was 10%. Over the years, the standard VAT rate has changed several times. For example, Conservative Chancellor Geoffrey Howe raised it from 8% to 15%.

In the past, there were also alternate VAT rates of 25% and 12.5% on petrol and some luxury goods. The history of VAT in the UK reflects the changing economy and the government’s priorities over time.

What are the UK VAT rates?

The UK has three main VAT rates: the standard rate of 20%, the reduced rate of 5%, and the zero rate of 0%. Each UK VAT rate applies to different goods and services. We cover this in more detail in Norway VAT Rates and Compliance Explained 2024.

VAT is charged on most goods and services in the UK. It's an indirect tax. This means businesses collect it for the government and pass it on to the end user.

Keeping up with current VAT rates helps you get your invoices and accounts right. This matters most for VAT-registered businesses that need to pay VAT.

Businesses must report VAT to HMRC (His Majesty’s Revenue & Customs) and manage any VAT they incur. Now, let’s look at each rate and what it covers.

What does the standard VAT rate (20%) cover?

The standard UK VAT rate of 20% applies to most goods and services sold by VAT-registered businesses in the UK. You work it out by adding 20% to the price of the goods or services.

Items subject to the standard VAT rate include electronics, clothing (excluding children’s clothing), and most professional services.

What does the reduced VAT rate (5%) cover?

The reduced UK VAT rate of 5% applies to a select group of goods and services. It covers items such as children’s car seats. With the reduced rate, the UK government aims to make these essential products and services more affordable.

What is zero-rated VAT (0%)?

Zero-rated VAT is a 0% VAT rate that applies to certain goods and services in the UK. It covers most foodstuffs, books, newspapers, and children’s garments.

Women’s sanitary products have been zero-rated since 1 January 2021. Installing energy-saving materials in homes is also zero-rated until 31 March 2027.

Zero-rated items still count as taxable. But no VAT is charged to the end consumer, which makes these essential goods more accessible.

What is the UK VAT registration threshold?

The current VAT registration limit in the UK is £90,000. This threshold decides whether a business needs to register for VAT.

Organizations with taxable turnover above the UK VAT threshold must register for VAT. Businesses with turnover below it can also register voluntarily. Once registered, businesses must charge VAT to their customers and pay it to HMRC when they file their VAT return.

VAT-registered businesses also need to know the difference between output tax and input tax. Output tax is the VAT collected on sales of goods and services. Input tax is the VAT a business pays on purchases for business use. Related reading: Key VAT Terms Every Business Owner Should Know.

Now, let’s look at taxable supplies and the VAT return process in more detail.

What are taxable supplies?

Taxable supplies are goods and services that are liable for VAT. Taxable turnover is the total value of all goods and services sold that are subject to VAT, including zero-rated items. It plays a key role in deciding whether a business must register for VAT.

Businesses selling both taxable and exempt goods or services can only reclaim the VAT that relates to their taxable supplies. It's important to recognize this point.

Businesses that only sell VAT-exempt goods or services do not have to register for VAT. They also cannot reclaim the VAT they paid on purchases for those sales.

How does the UK VAT return process work?

In a UK VAT return, businesses report their taxable supplies and input VAT, and pay any VAT due to HMRC.

For small businesses, the Flat Rate Scheme can make VAT returns simpler. It lets businesses with an annual turnover of less than £150,000 pay a fixed percentage of their turnover to HMRC every three months.

The Flat Rate Scheme reduces paperwork for small businesses. It also lets new companies keep some of the VAT they charge their customers.

What VAT exemptions and special schemes exist in the UK?

UK VAT exemptions and special schemes offer relief for certain businesses. They let some businesses avoid paying VAT on selected goods and services.

Exempt goods and services include insurance, financial services, and health services from registered doctors and dentists. Most food, children’s clothing, and books are not exempt. They are zero-rated instead. HMRC also offers a number of schemes, including the Flat Rate Scheme and the Annual Accounting Scheme.

Which goods and services are VAT exempt?

In the UK, goods and services exempt from VAT include insurance, financial and property transactions, education and training, fundraising events by charities, and subscriptions to membership organizations.

Other VAT exempt items include land and postal services. These exemptions help reduce costs for consumers and support specific industries.

What is the Flat Rate Scheme?

The Flat Rate Scheme is a simple VAT accounting method for small businesses in the UK. Businesses with an annual turnover of £150,000 or less can join. The Flat Rate Scheme lets them pay a fixed percentage of their turnover as VAT to HMRC. This percentage depends on the type of business.

The Flat Rate Scheme makes VAT accounting easier for small businesses. It saves time and money because they don't need to track every VAT payment and reclaim.

What is the Annual Accounting Scheme?

The Annual Accounting Scheme lets businesses submit VAT returns and make payments once a year rather than quarterly. The Annual Accounting Scheme can help businesses with uneven turnover and reduce the work of regular VAT returns.

What is the Cash Accounting Scheme?

The Cash Accounting Scheme is designed for businesses with cash flow issues. Under the Cash Accounting Scheme, you account for VAT only when your customer pays you, not when you issue an invoice. This can improve cash flow, as you don't pay the VAT until you've received it from customers.

These are just a few of the VAT accounting schemes available in the UK. Each scheme has its own eligibility rules and benefits, so consider which one best suits your business.

How do you pay and reclaim VAT in the UK?

You pay UK VAT through options such as Direct Debit, online banking, a debit or corporate credit card, and standing orders. You reclaim input VAT by submitting a VAT return. Both are essential parts of running a VAT-registered business.

The UK has a time limit of four years to fulfill its obligation of paying VAT. In cases of VAT fraud or deliberate failure to follow VAT rules, this time limit can be extended up to 20 years.

Reclaiming input VAT means claiming back the VAT paid on business purchases. To reclaim input VAT, businesses must submit a VAT return. You need proper documents, such as invoices, to show that the VAT was paid and reclaim it successfully.

How can you pay a UK VAT bill?

You can pay a UK VAT bill by Direct Debit, online with a debit or corporate credit card, by bank transfer, or by standing order. You can also pay at your bank or building society using paying-in slips from HMRC. You cannot pay with a personal credit card.

Online payments and bank transfers are convenient and generally faster. Standing orders give businesses a recurring way to pay. The right payment option depends on what each business prefers and needs.

How do you reclaim input VAT?

To reclaim input VAT, businesses must submit a VAT return and enter the input VAT paid in Box 4 of the return. The claim must be submitted before the end of the fourth year after the year in which the deductible VAT was payable. If you miss this deadline, your claim will be ineligible.

For a successful claim, businesses must provide invoices and other relevant documents to prove they paid VAT on the purchases. Keeping accurate records and carefully tracking input VAT helps the reclaim go smoothly.

How does VAT apply to UK imports and exports?

UK businesses in international trade have VAT obligations on imports and exports. The rules for import VAT and export VAT depend on the destination country and the type of goods or services traded.

For imports from the European Union, VAT is typically charged at the same rate as if the goods were bought within the UK.

In contrast, goods exported from Great Britain to countries outside the UK are generally not subject to VAT. These goods can usually be zero-rated.

Since Brexit, the same export VAT rules apply to goods sent from Great Britain to the European Union. You need valid evidence of export to zero-rate the sale.

What is import VAT?

Import VAT is a tax on goods brought into a country from another country. Import VAT is normally charged at the same rate as if the goods had been supplied in the UK. For most goods, that is the standard rate of 20%.

VAT-registered businesses can account for import VAT on their VAT return through postponed VAT accounting. Or they can pay it when the goods are imported. Businesses in international trade need to understand the rules and rates for import VAT. It's important to know the different rules and rates that apply to different countries. You can also read 8 Fun Facts About VAT in Europe.

What is export VAT?

Export VAT refers to the VAT that is not charged on goods exported from the UK to a destination outside the UK. The sale can be zero-rated, as long as the seller has valid proof of the export and follows all other rules.

This zero rating encourages international trade. It also reduces costs for businesses and their overseas customers. Understanding export VAT rules is vital for businesses in cross-border trade.

Which industries get VAT relief?

The UK hospitality and tourism sectors received VAT relief through a temporary VAT rate cut from 20% to 5%. The 5% rate applied from July 15, 2020 to September 30, 2021. A 12.5% rate then applied from October 1, 2021 to March 31, 2022. VAT relief for certain industries can provide significant financial advantages.

The reduced rates covered food and non-alcoholic drinks served on the premises, hot takeaway food and drinks, holiday accommodation, and admission to certain attractions. From April 1, 2022, the standard rate of 20% applied again.

This relief aimed to support these industries through the hard economic times of the Covid-19 pandemic.

Can travelers still get VAT refunds in the UK?

Travelers can no longer get VAT refunds on shopping in Great Britain. The VAT Retail Export Scheme, known as tax-free shopping, ended in England, Scotland, and Wales for purchases from 1 January 2021.

The scheme still runs in Northern Ireland. Visitors from outside Northern Ireland and the EU can claim VAT back on goods bought from participating Northern Ireland retailers.

Why does the UK VAT rate matter for your business?

Understanding the UK VAT rate and the basics of the UK VAT system helps businesses make well-informed decisions. This includes VAT thresholds, VAT rates, and special VAT schemes. With this knowledge, you can navigate the UK VAT system with confidence.

VAT obligations are a fact of life for businesses, whether inside or outside the UK. The better prepared you are, the more successful your business will be.

Do you need help with your VAT compliance? Book a free call with one of our VAT experts to find bespoke solutions for your business, optimize your VAT costs, and reach millions of new potential customers.

How Taxually handles this

Taxually’s CrossTax handles VAT registration, VAT, OSS and IOSS returns and fiscal representation in the countries you sell into, and checks your sales data against 250+ validation rules before each filing. OneTax then pays every tax authority with one bulk payment in your chosen currency.

Related guides

• Selling from the UK to Europe after Brexit
• Understanding HMRC VAT Invoice Requirements in the UK
• What Is Import VAT in the UK and EU? A Complete Guide