Value-added tax (VAT) is an indirect tax added to most goods and services. Unlike income tax, which directly impacts earnings, VAT is a consumption tax, which is paid by the customer as part of the purchase price. VAT is a major revenue stream for the United Kingdom’s government, with VAT receipts totaling £160 billion in the 2022–2023 financial year. It also influences customer behavior: for instance, some goods are exempt or charged at a lower rate to make them more accessible.

For businesses, handling VAT involves charging the tax on sales and reclaiming it on purchases from the UK’s Revenue & Customs (HMRC). Businesses must educate themselves on how to manage VAT to ensure compliance, avoid penalties, and effectively adjust their cash flows and pricing tactics in a competitive market.

Below, we’ll cover the current UK VAT rates, how to calculate and apply UK VAT, and recent changes to it.

What’s in this article?

• Current UK VAT rates
  
• How to calculate and apply VAT in the UK
  
• Recent changes and updates to UK VAT
  

Current UK VAT rates

In the UK, there are three main VAT rates that apply to goods and services. As of 2024, they are the following:

• Standard rate (20%): This is the most common VAT rate and applies to most goods and services including electronics, furniture, nonbasic food items (e.g., snacks, sugary drinks), clothing for adults, and services such as consulting and marketing.

• Reduced rate (5%): This rate applies to specific goods and services that the government wants to support or that are considered necessary. Examples include domestic gas and electricity, children’s car seats, and some energy-saving home improvements.

• Zero rate (0%): Zero-rated goods and services include basic food items (e.g., bread, milk, vegetables), children’s clothing, books and newspapers, and some public transport services. While customers don’t pay any VAT, businesses dealing in zero-rated items can still reclaim VAT on related business expenses.

How to calculate and apply VAT in the UK

VAT applies whenever a sale of goods or services occurs in the supply chain. Here’s how it works for each party:

• Manufacturer: When a manufacturer sells goods to a wholesaler, it adds VAT to the sale price at the applicable rate. For example, if the product price is £100 and the standard VAT rate is 20%, the manufacturer charges £120 (£100 + £20 VAT).

• Wholesaler: When selling to a retailer, the wholesaler adds VAT to the selling price. If the wholesale price is £150, it charges £180 (£150 + £30 VAT). The wholesaler can reclaim the £20 VAT paid to the manufacturer from HMRC, the UK’s tax authority.

• Retailer: The retailer sells the goods to the final customer at a price that includes VAT. If the retail price is £200, the customer pays £240 (£200 + £40 VAT). The retailer can reclaim the £30 VAT paid to the wholesaler from HMRC.

• Customer: The final customer pays the VAT-inclusive price. There is no VAT to reclaim.

Business VAT collection and payment

Businesses registered for VAT collect it on behalf of HMRC. They must register for VAT if their taxable turnover exceeds £90,000 in a 12-month period. Registration is optional if turnover is below this threshold, which can be advantageous for businesses that want to reclaim VAT on purchases.

Types of VAT

Here are the different types of VAT businesses must collect, pay, and calculate:

• Output VAT: This is the VAT businesses charge on their sales (outputs). For example, if a business sells a product for £200 with a 20% VAT rate, they charge £240, with £40 as the output VAT.

• Input VAT: This is the VAT businesses pay on their purchases (inputs). For instance, if a business buys raw materials for £100 and the supplier charges 20% VAT, the business pays £120, with £20 as the input VAT.

• Net VAT payable: When businesses file their VAT returns, they calculate the difference between the output VAT and the input VAT. If the output VAT is higher, they pay the difference to HMRC. If the input VAT is higher, they can reclaim the difference.

Pricing

Businesses must decide whether to display prices inclusive or exclusive of VAT. Business-to-consumer (B2C) companies typically display VAT-inclusive prices, since customers expect to see the total price they’ll pay. Business-to-business (B2B) companies often exclude VAT on displayed prices, since businesses know they can reclaim input VAT.

VAT reporting

Businesses must report their VAT through regular VAT returns (usually quarterly). The return details total sales, purchases, VAT collected, and reclaimable VAT. Businesses must keep accurate records to avoid penalties and ensure correct VAT accounting. Charging the wrong VAT rate or failing to comply with VAT rules can result in underpayment or overpayment of VAT, penalties, interest charges, or even audits.

VAT exemptions

Some goods and services are exempt from VAT. This means businesses cannot charge or reclaim VAT on them. Examples include insurance, some education services, and subscriptions to membership organizations. Other transactions are outside the scope of VAT, such as goods or services bought and used outside of the UK and statutory fees (e.g., congestion charges). Businesses cannot charge or reclaim VAT on these transaction types.

Recent changes and updates to UK VAT

Recent changes and updates to the UK VAT system reflect the government’s efforts to adapt to economic challenges, post-Brexit conditions, and support specific sectors. Here are the key changes to UK VAT and related policies over the past few years.

Making Tax Digital (MTD) VAT changes

The Making Tax Digital (MTD) initiative is an ongoing effort to digitize the tax system. MTD rules require businesses to keep digital records and use compatible software to file their VAT returns.

• April 1, 2022: All VAT-registered businesses, regardless of turnover, must comply with MTD rules. Previously, MTD only applied to businesses with a taxable turnover above the VAT threshold of £90,000.
  

Women’s sanitary tax VAT changes

The UK abolished the tax on women’s sanitary products.

• January 1, 2021: A zero rate of VAT went into effect.
  

Post-Brexit VAT changes

After the UK left the European Union, there were substantial changes in how VAT is charged on goods and services traded between the UK and the EU. (Northern Ireland has its own protocol.)

• January 1, 2021: Goods imported from the EU now receive the same treatment as those from non-EU countries. UK businesses must pay import VAT on goods imported from the EU and reclaim this input VAT on their returns.

• January 1, 2021: Most UK businesses can no longer use the EU VAT refund system to reclaim VAT on expenses incurred in the EU. Instead, they must use the 13th Directive process.

COVID-19 VAT changes

To help the hospitality and tourism sector recover from the impact of the COVID-19 pandemic, the UK government introduced temporary VAT rate reductions for supplies related to hospitality, hotels and holiday accommodations, and admissions to attractions such as amusement parks and theaters.

• July 15, 2020–September 30, 2021: These businesses saw a temporarily reduced VAT rate of 5%.

• October 1, 2021–March 31, 2022: The reduced rate increased to 12.5%.

• April 1, 2022: The rate returned to the standard 20%.

Energy-related VAT changes

To promote energy efficiency and support environmental goals, the government introduced a temporary change to the VAT rate for the installation of energy-saving materials such as insulation, solar panels, and heat pumps in residential properties. This made it more affordable for homeowners to invest in energy-efficient upgrades and support the UK’s broader green agenda.

• April 1, 2022: A zero rate of VAT went into effect.

• April 1, 2027: The VAT rate for these supplies will revert back to 5%.

Building and construction VAT changes

The UK introduced adjustments regarding VAT in the construction sector to combat VAT fraud. They included a reverse charge, which requires the customer, rather than the supplier, to account for VAT.

• March 1, 2021: Some building and construction services, mainly B2B transactions within the Construction Industry Scheme, must use a reverse charge.