A beginner's guide to VAT

VAT: Where do I start? What is VAT? Who has to register for VAT? What rate should I charge? How do I calculate VAT? When are my VAT filing obligations?

This is a freeview ‘At a glance’ guide to Value Added Tax (VAT). 

Subscribers see Starting in business: VAT and VAT Toolkit

What is VAT?

  • Value Added Tax or VAT is a tax charged on most goods and services sold by VAT-registered businesses in the UK.
  • When a VAT-registered business buys goods and services it can usually reclaim the VAT paid if certain conditions are met (see below).

Who has to register for VAT?

  • A Business making taxable supplies in the UK, i.e. not only exempt or out-of-scope supplies, which:
  • If you are going to make any taxable supplies you can choose to register for VAT, regardless of your expected or actual level of turnover. This is known as voluntary registration.
  • You cannot register if you do not or will not make taxable supplies, for example, if all of your supplies are exempt.
  • Businesses based outside of the UK that supply goods or services to the UK must register for UK VAT regardless of the value of their taxable supplies. These are known as Non-Established Taxable Persons (NETPs). 

See Registering for VAT

If you do not register for VAT when you should have because you have exceeded the registration threshold you can be charged penalties for failure to notify.

  • Penalties can also be charged for late deregistration.

See VAT: Penalties

What does being VAT-registered mean?

Once you are VAT registered you must:

  • Charge VAT on all taxable (non-exempt) goods and services.
  • Issue valid VAT invoices.
  • File a VAT return online by the deadline on a monthly or quarterly basis unless you have opted for annual VAT accounting.
  • Pay any VAT due to HMRC before the deadline to avoid interest and Penalties. 
  • Monitor your situation to see if you need to Deregister because you are no longer making taxable supplies or have ceased trading altogether.
  • Keep proper VAT records (see below).

What are my VAT obligations?

Once you are VAT registered you must file periodic VAT returns with HMRC. These must be submitted online in accordance with Making VAT Digital requirements.

If you are not registered for VAT you have no obligations as you cannot charge or reclaim VAT.

Most businesses file quarterly VAT returns, however:

  • If your taxable supplies are below £1.6m you can apply for the annual accounting scheme which means you only have to file one VAT return per year.
  • The return is due within two months of the end of your VAT year.
  • You must make nine interim VAT payments during the year

See Annual accounting

It is also possible for a business to ask to file VAT returns monthly.

  • This may be beneficial if you regularly submit repayment VAT returns.

HMRC may demand monthly returns where they consider that it is necessary for the protection of the revenue.

The exact deadlines for the filing of VAT returns and payment of VAT are based on your monthly/quarterly accounting period end but are:

  • One calendar month and seven days from the end of your VAT accounting period.

See Calendar of tax deadlines

See VAT: Penalties

You cannot charge VAT unless you are registered for VAT. Once you have applied for registration you must wait for your VAT number before you start charging VAT.

If you make an error in your VAT return you can be charged penalties for inaccuracies. See VAT: Penalties.

The VAT penalty regime changed on 1 January 2023: you can read about the new rules here:

What rate of VAT do I have to charge?

This depends on:

  • The type of supply: is it a supply of Goods or services?
  • The place of supply. This is determined by:
    • Working out whether the supply is business to business or business to consumer.
    • Deciding whether it is within the general rules or covered by any exemptions.

See Place of supply: Services and Place of supply: Goods

There are currently three main rates of VAT:

  • 20%: this is the ‘standard rate’ which applies to any taxable supplies not subject to any of the other rates.
  • 5%: the ‘reduced rate’ which applies to certain specific items, notably:
    • Domestic fuel and power.
    • Sanitary hygiene products.
    • Children's car seats.
    • Certain building works to convert a property into a dwelling or to renovate certain dwellings. See Land & Property: Dwellings
  • 0%: the ‘zero rate’. Zero-rated goods and services are still taxable supplies but the rate is 0%. These include:

If an item is exempt or out of the scope of VAT you do not have to charge VAT on the sale and these are not taxable supplies. Examples include (these lists are not exhaustive):

Exempt items:

Out-of-scope items:

  • Voluntary donations to charity.
  • Welfare services provided by charities at significantly below cost.
  • Non-business activities or hobbies.
  • Statutory fees such as MOT tests and tolls for bridges, tunnels, and roads operated by public authorities.

See VAT Rates & Fractions

Flat rate schemes

Businesses with a qualifying turnover of up to £150,000 can apply to use a VAT flat rate scheme as a simplification measure. 

Under the traditional flat rate scheme, businesses apply a lower flat rate percentage to gross sales instead of calculating input and output VAT when submitting their VAT return. This amount is then paid to HMRC. 

  • The Flat Rate Scheme (FRS) rate depends on the type of business and can be anything between 6.5% and 14.5% as long as you are not a limited-cost trader (see below). There is a 1% discount in year one.
  • The Limited cost trader FRS has a rate of 16.5% with a 1% discount in year one.

There is also an Agricultural flat rate scheme for farmers. This operates very differently from the traditional FRS, as it requires deregistration from VAT. 

Under the agricultural FRS: 

  • A 4% additional flat rate is added to sales of qualifying supplies.
  • This 4% can be kept by the farmer as compensation for losing input tax on purchases.
  • A VAT-registered customer can recover the 4% as input VAT applying the normal rules.
  • No VAT returns are due under the scheme.

The benefit of using the scheme is that VAT registration can be avoided in many cases where taxable turnover from farming exceeds the compulsory VAT registration threshold. 

How do I calculate the VAT I have to charge?

Once you have established the correct rate to charge, you calculate the VAT you charge based on the net price of your good or service.

For a standard-rated item if the net amount is £100 the VAT is 20% i.e. £20.

If you need to work out the net from a VAT-inclusive amount you apply the VAT fraction. This is:

  • Standard rate (20%): 1/6
  • Reduced rate (5%): 1/21

For example, for a standard-rated item, if the VAT inclusive price is £120 x 1/6 = £20 VAT and £100 net. For a reduced rated item if the VAT inclusive price is £105 x 1/21 = £5 VAT and the net is £100.

See VAT Rates & Fractions

VAT calculator:

Works out the VAT charged for gross or net figures

Step 1: Select whether the goods or supply are Standard, Reduced, Zero-rated or exempt.

  • Most goods are standard-rated, but supplies like domestic electricity and gas are reduced-rated, food and children's clothes are generally zero-rated, and things like loan interest and bank charges are all exempt.

Step 2 : Enter the gross or net price or both

The 'gross' price, is the full price that you pay, this is the cost of the good or service including VAT

  • Enter a VAT-inclusive price (gross price) to work out how much VAT is included in a price.

The 'net' price, is the cost of the good or service before VAT is added:

  • Enter a net price to work out what VAT will be added

VAT rate
Enter gross price
Enter net price
VAT calculator

How do I calculate what VAT is payable to HMRC?

The VAT you charge on your sales is called ‘output tax’

The VAT you pay when you buy goods and services is called ‘input tax’.

  • If the output tax exceeds the input tax on your VAT return you will have to pay the difference to HMRC.
  • If the input tax is the higher number then you will be due a repayment from HMRC.

You will need to be careful to ensure that no special rules apply which might prevent the recovery of some input VAT.

What if I sell to customers abroad or buy from suppliers abroad?

Sales to overseas customers are called exports.

  • Exports are zero-rated and from 1 January 2021, this applies to all sales to overseas customers including those in EU countries.
  • Exports can only be zero-rated if there is evidence of export.

Purchases from overseas suppliers are called imports:

  • The treatment of imports depends on their value:
    • Below £135, VAT is collected at the point of sale.
    • Above £135, VAT is payable at the border, unless postponed VAT accounting is applied.
  • If you supply goods or services to customers outside the UK you will need to consider the VAT rules for overseas trading. You may need to register for VAT or its equivalent in another country.

See International goods

What if I only sell goods, online?

The same rules apply, it depends on the Place Of Supply (POS) as to where VAT is charged.

  • If the POS is in the UK then UK VAT applies.
  • If the POS is overseas it is an export and zero-rated but overseas VAT and customs duty may apply.

If you are an overseas business selling goods in the UK online you may need to register for UK VAT.

There are special rules where overseas businesses store goods in the UK to sell online.

See Online Marketplaces: Selling goods in the UK

What records do I need to keep for VAT?

VAT-registered businesses must keep records of:

  • Sales and purchases.
  • A separate summary of VAT, known as a VAT account, gives details of sales, purchases and amounts owed to/by HMRC as well as any bad debts that are written off.
  • Copies of all VAT invoices issued.
  • Copies and details of any self-billing agreements.
  • Debit or credit notes.
  • Import and export records.
  • Records of any items where VAT cannot be reclaimed and of any goods given away or taken from stock for private use.
  • Records of all the zero-rated reduced or exempt items you buy and sell.
  • General business records e.g. bank statements, cheque stubs, till rolls.

See Record-keeping & tax: What, how and until when?

Under MVD you must keep digital records of:

  • Designatory data such as business name, principal place of business, VAT registration number, and details of any VAT accounting schemes used.
  • Supplies made.
  • Supplies received.
  • Summary data (i.e. the VAT data).

See Making Tax Digital: VAT (subscriber guide)

Other useful guides on this topic

Cars & Vans: VAT
What is a car for VAT? What is a van for VAT? What VAT can be recovered on a car that is bought? Leased? What about fuel? Or mileage reimbursements? 

Capital Goods Scheme
What is the VAT Capital Goods Scheme (CGS)? When do I use it? How does it work?

Fuel scale charges (VAT)
What is the VAT fuel scale charge? What alternatives are there to the VAT fuel scale charge? Does the VAT fuel scale charge apply to vans?

Partnerships & VAT
Like any other business, partnerships are required to register for VAT once their taxable turnover passes the applicable threshold. However, there are some complications specific to partnerships.

Taking over a business (VAT traps)
What do you need to do for VAT purposes if you start to run a similar business to one which operated from the same premises or if you take over an existing business? What if the business you take over has ceased trading or gone bust?

VAT Toolkit
This is our summary version of HMRC's output and input VAT toolkits, our version includes more detail, topics and planning points.

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