What VAT is
VAT — Value Added Tax — is a tax added to the price of most goods and services sold in the UK. It is charged at each stage a business adds value, but in practice the person who pays it is the final customer: the price on the shelf or the invoice either already includes VAT or has it added on top. Businesses that are VAT-registered collect it on their sales, reclaim it on their purchases, and hand the difference to HMRC.
VAT has existed in its current form since 1 April 1973, when it replaced Purchase Tax as a condition of the UK joining the European Economic Community. The standard rate has moved several times since — it started at 10%, dropped to 8% within a year, and has been raised in stages to its current 20%, in place since 4 January 2011.
The three UK rates
Not everything is taxed the same way. HMRC sets three VAT bands, published at gov.uk/vat-rates:
- Standard rate — 20%. The default. Most goods and services fall here: electronics, clothes for adults, restaurant meals, alcohol, and the vast majority of everyday retail.
- Reduced rate — 5%. A shorter list of specific items, including domestic gas and electricity, mobility aids installed in the home for people over 60, children's car seats, and products that help people stop smoking.
- Zero rate — 0%. Taxed, but at nil. Most food (hot takeaway food is a common exception), children's clothes and footwear, books, newspapers and printed music, and public transport fares are zero-rated.
Zero-rated is not the same as exempt, and the difference matters to any business tracking its own VAT. A zero-rated sale is still a taxable supply — it counts towards the VAT registration threshold, and a business selling zero-rated goods can still reclaim the VAT it paid on its own costs. Exempt items — insurance, most financial services, postage stamps, health services from registered providers — sit outside the VAT system altogether, and a business dealing only in exempt supplies generally cannot reclaim input VAT at all.
Who has to register
A business must register for VAT once its taxable turnover over any rolling 12-month period passes the registration threshold, currently £90,000, raised from £85,000 with effect from 1 April 2024. This is not a tax-year test: HMRC looks back across any trailing twelve months, so a business can tip over the threshold mid-year and be required to register from that point. A business must also register immediately, rather than waiting for the 12-month look-back, if it expects to exceed the threshold within the next 30 days alone — a large one-off contract can trigger this on its own. The current threshold is confirmed at gov.uk/vat-registration.
Registration is not only a threshold rule. A business under £90,000 can register voluntarily, which lets it reclaim VAT on purchases — useful if its customers are other VAT-registered businesses that will reclaim the VAT it charges them anyway. Once registered, a business must charge VAT on its taxable sales, file returns (usually quarterly, and usually through Making Tax Digital-compatible software), and keep digital VAT records.
How the maths works
Whichever rate applies, there are only two calculations: adding VAT to a net (pre-VAT) price, and removing VAT from a gross (VAT-inclusive) price.
Here rate is the percentage written as a decimal — 0.2 for the standard 20% rate, 0.05 for the reduced 5% rate. The two formulas are opposites of each other, which is why a calculator built around them can run in either direction from the same inputs.
Worked example — adding VAT at the reduced rate
A supplier quotes £100.00 net for a domestic boiler service, VAT-able at the reduced 5% rate that applies to home energy work. The VAT is £100.00 × 0.05 = £5.00, so the customer's invoice totals £100.00 + £5.00 = £105.00.
Worked example — finding the VAT hidden in a receipt
A till receipt shows a total of £60.00, standard-rated at 20%, and you need the net figure for a business expense claim. Divide by 1.2: £60.00 ÷ 1.2 = £50.00. The VAT portion is the difference, £60.00 − £50.00 = £10.00. A common mistake here is taking 20% of the gross figure directly — that overstates the VAT, because 20% of a VAT-inclusive amount is more than the VAT it actually contains. As a check: 20% of £100.00 net is £20.00, which only equals the true VAT when you start from the net figure, not the gross one.
Where this trips people up
- Freelancers approaching the threshold. Because the test is a rolling 12 months rather than the tax year, it is easy to cross £90,000 without noticing until a big invoice pushes you over. Tracking turnover monthly avoids a late-registration penalty.
- Reading a "plus VAT" quote. A tradesperson's quote of "£500 plus VAT" and a headline price of "£500 inc. VAT" are different numbers by 20% — worth checking which one you are being shown before comparing quotes.
- Reclaiming VAT on mixed-rate purchases. A single supermarket receipt can mix standard, reduced and zero-rated items, so the VAT total on the receipt is not a simple percentage of the whole bill.
- Assuming zero-rated means VAT-free for the business. A business that only sells zero-rated goods is still VAT-registered and still reclaims input VAT — it just never charges any on its own sales.
Frequently asked
Has the VAT registration threshold always been £90,000?
No. It rose from £85,000 to £90,000 on 1 April 2024, the first increase in several years. HMRC reviews the figure periodically, so it is worth checking gov.uk for the current threshold rather than relying on an older figure.
Do I charge VAT if I am not registered?
No — only a VAT-registered business can legally charge VAT, and it must show a valid VAT registration number on its invoices. Charging VAT without being registered is not permitted.
Why do some receipts show no VAT breakdown at all?
Simplified VAT receipts, common for smaller transactions, are only required to show the total, the VAT rate and the VAT-inclusive price, not a separate VAT figure. If you need the VAT amount split out for expenses or accounting, use the rate shown to work it back out, or ask for a full VAT invoice.
Is this guide a substitute for HMRC guidance?
No. This is a plain-language explanation of how UK VAT works, not tax advice. For registration, filing or how a specific product is rated, use gov.uk or an accountant. You can put these figures straight into our VAT calculator, and read about our approach on how we build and verify our tools.