What Is VAT?

Key facts

VAT is a tax on consumer spending — businesses collect it on behalf of HMRC.
The standard rate is 20%, with reduced (5%) and zero (0%) rates for certain items.
Businesses with taxable turnover above £90,000 must register for VAT.
VAT-registered businesses charge VAT on sales and reclaim VAT on business purchases.

How VAT Works in the UK

VAT is a consumption tax added to the price of goods and services at each stage of production and distribution. The end consumer pays the full amount, but businesses along the supply chain collect and remit it to HMRC.^[1]

Unlike income tax (which taxes earnings), VAT taxes spending. Every time you buy something in a shop, eat at a restaurant, or pay for a service, you’re almost certainly paying VAT.

VAT Rates in the UK

There are three VAT rates in the UK:^[1]

Rate	Percentage	Examples
Standard	20%	Most goods and services
Reduced	5%	Home energy, children’s car seats, sanitary products
Zero	0%	Most food, children’s clothes, books, newspapers

Some goods and services are exempt from VAT (e.g. insurance, financial services, education) or outside the scope of VAT entirely (e.g. wages, statutory fees).

Who Actually Pays VAT?

The end consumer bears the cost of VAT. Businesses are simply the collection agents. A VAT-registered business charges VAT on its sales (output VAT) and reclaims the VAT it pays on business purchases (input VAT). The difference is paid to (or refunded by) HMRC.^[2]

Who Must Register?

You must register for VAT if your VAT taxable turnover exceeds £90,000 in any rolling 12-month period, or you expect it to exceed that threshold in the next 30 days alone.^[3]

You can also register voluntarily below the threshold — useful if you sell mainly to VAT-registered businesses or want to reclaim VAT on purchases.

Tip: The VAT registration threshold was £85,000 until April 2024, when it increased to £90,000. Always check the current figure on GOV.UK.

How Is VAT Collected?

VAT-registered businesses file a VAT Return (usually quarterly) showing the VAT they’ve charged and the VAT they’ve paid. If output VAT exceeds input VAT, the business pays the difference to HMRC. If input VAT is higher, HMRC issues a refund.^[2]

VAT and Making Tax Digital

Since April 2022, all VAT-registered businesses must keep digital records and file VAT Returns using MTD-compatible software. This is called Making Tax Digital for VAT.

Frequently Asked Questions

What is VAT and how does it work?

VAT (Value Added Tax) is a consumption tax added to the price of goods and services. Businesses collect VAT on behalf of HMRC and pay the difference between what they charge (output VAT) and what they pay on purchases (input VAT).

What are the VAT rates in the UK?

There are three VAT rates: standard (20%) for most goods and services, reduced (5%) for items like home energy and children’s car seats, and zero (0%) for items like most food, children’s clothes, and books.

When do I need to register for VAT?

You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period, or if you expect it to exceed £90,000 in the next 30 days alone. You can also register voluntarily below the threshold.

Who pays VAT?

The end consumer bears the cost of VAT. VAT-registered businesses are collection agents — they charge VAT on sales, reclaim VAT on business purchases, and pay the net difference to HMRC.

What is the difference between exempt and zero-rated for VAT?

Zero-rated supplies are taxable at 0% and you can reclaim input VAT on related purchases. Exempt supplies are not taxable and you cannot reclaim input VAT on purchases used to make exempt supplies.

Sources

VAT rates — GOV.UK
How VAT works — GOV.UK
Register for VAT — GOV.UK