Value-added tax (VAT) is an indirect tax added to most goods and services. 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 totalling £171 billion in the 2024–2025 financial year. VAT also influences customer behaviour: 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 this tax.

What's in this article?

• Current UK VAT rates
  
• How VAT works across the supply chain
  
• Recent changes and updates to UK VAT
  
• How Stripe Tax can help
  

Current UK VAT rates

In the UK, there are three main VAT rates that apply to goods and services. As of 2026, the three rates are:

• 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 (such as bread, milk, and 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 VAT works across the supply chain

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.

How businesses collect, register for and pay VAT

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: Output VAT, Input VAT, and Net VAT

Here are the different types of VAT that 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.

How VAT affects 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 requirements

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 and out-of-scope goods and services

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 organisations. 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 and post-Brexit conditions, as well as support specific sectors. Below, we'll cover the current rules businesses need to follow and what upcoming changes they should prepare for.

Making Tax Digital (MTD) VAT changes

The Making Tax Digital (MTD) initiative requires all VAT-registered businesses to keep digital records and use compatible software to file VAT returns, regardless of turnover. Manual or paper-based VAT return submission is not permitted.

E-invoicing is the next major shift. Following a 2025 government consultation, the UK is moving towards mandatory e-invoicing aligned with EU and other major trading jurisdictions.

• 2026: The government is expected to publish a detailed roadmap for e-invoicing adoption, with full mandatory implementation targeted for 2029.
  
• April 2029: All VAT invoices will be required in a specified electronic format. Businesses relying on manual or PDF-based invoicing should begin assessing compatible software now.
  

Post-Brexit VAT changes

After a few years of working through implementation, Post-Brexit rules are now the established baseline for UK-EU trade. Goods imported from the EU are treated the same as those from non-EU countries – businesses pay import VAT and reclaim it as input VAT on their returns. Most UK businesses cannot use the EU VAT refund system for expenses incurred in EU member states and must use the 13th Directive process instead. Northern Ireland operates under its own separate protocol.

Businesses with cross-border operations should monitor ongoing divergence between UK and EU VAT rules, particularly as the EU's own VAT in the Digital Age (ViDA) reforms continue to progress.

Energy-related VAT changes

To promote energy efficiency and support the UK's green agenda, the government introduced a zero rate of VAT for the installation of energy-saving materials such as insulation, solar panels, and heat pumps in residential properties. This remains in force, but businesses and homeowners should be aware of the upcoming change.

• 1 April 2022 – 31 March 2027: A zero rate of VAT applies to qualifying installations.

• 1 April 2027: The VAT rate is legislated to revert to 5%. Businesses in the energy efficiency sector and homeowners considering upgrades should factor this deadline into their planning.

Building and construction VAT changes

The UK introduced adjustments regarding VAT in the construction sector to combat VAT fraud, requiring the customer rather than the supplier to account for VAT on certain supplies.

• 1 March 2021: The reverse charge came into effect for certain building and construction services, primarily B2B transactions within the Construction Industry Scheme (CIS). This is now established practice, but HMRC audits in this sector remain active and invoice errors are a common compliance risk. Construction businesses must confirm CIS registration status for counterparties on every in-scope supply.
  

Private school fee VAT changes

The government removed the long-standing VAT exemption for education, training, and boarding services provided by private schools, making this one of the most significant VAT policy shifts in recent years.

• 1 January 2025: The VAT exemption was removed. Private schools must now charge VAT at the standard 20% rate, with many previously unregistered schools required to register for VAT for the first time.
  
• Anti-forestalling rules apply: any fees invoiced or paid after 29 July 2024 for education delivered in 2025 or later are automatically subject to VAT. HMRC is actively scrutinising prepayment arrangements, and legal disputes are expected. Schools and families involved in large advance fee payments should seek specialist advice.
  

HMRC Late Payment Penalties

HMRC has introduced a tougher, structured penalty regime for late VAT payments. The new rates represent a significant escalation for businesses with cash flow pressures, making prompt payment more critical than ever.

• 1 April 2025: Penalties increased to 3% for payments delayed beyond 15 days, an additional 3% if still unpaid at 30 days, and 10% annually on any amount unpaid from day 31.
  

Private Hire Vehicles and the Tour Operators' Margin Scheme

Following an Upper Tribunal ruling in March 2025, the government legislated to exclude private hire vehicle and taxi operators from the Tour Operators' Margin Scheme (TOMS).

• 2 January 2026: VAT-registered operators contracting as principals must account for VAT at the standard 20% rate on the full passenger fare, except where services are supplied alongside other travel services.
  
• A split liability model remains in operation: London-based operators are required to contract as principals, while the Supreme Court's July 2025 ruling confirmed that operators in the rest of England may continue to act as agents. Operators across both models should review their VAT position.
  

VAT Grouping – Whole Establishment Rule

The UK reversed the VAT treatment of intra-entity services within VAT groups that had applied following the Skandia case.

• 26 November 2025: The UK reverted to the "whole establishment" principle, meaning intra-entity services between UK head offices and overseas branches within the same VAT group no longer trigger a VAT liability. Businesses with international group structures should confirm their VAT group registrations and intercompany billing arrangements reflect this change.
  

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard or using our powerful API.

Stripe Tax helps you monitor your obligations and alerts you when you exceed a tax registration threshold based on your Stripe transactions. It can also register to collect tax on your behalf in the US, automate US filings in the Dashboard, and manage global filings through trusted partners. Stripe Tax automatically calculates and collects sales tax, VAT, and GST on:

• Digital goods and services in all US states and over 100 countries
  
• Physical goods in all US states and 42 countries
  

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration, or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: If you need to register for a sales tax in the US, let Stripe manage your tax registrations. You'll benefit from a simplified process that prefills application details – saving you time and simplifying compliance with local regulations. If you need help registering outside of the US, Stripe partners with Taxually to help you register with local tax authorities.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax automates US filings in the Dashboard, powered by TaxJar. For global filings, Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax or get started today.