What is VAT? - Complete Guide (Updated for 2024/25)

Most people will have heard of VAT. What people might not realise is that a third of all revenue collected by the government comes from VAT.

VAT not only affects businesses but every one of us in purchases that we make (both online and on our high street). Despite its importance, it remains one of the least understood of all taxes.

To the high street consumer, VAT becomes part of the price, and we often do not even think about it. Businesses, however, have a different outlook on it. VAT is often profit-neutral but nevertheless an important area of their activities. Failure to account for it in the correct manner can lead to serious issues.

This guide is aimed towards businesses, rather than the general consumer.

What is VAT?

VAT is a tax imposed on most goods and services in the United Kingdom. VAT is a consumption tax that is levied at each stage of the supply chain, from production to final sale to the consumer. Businesses registered for VAT must charge VAT on the goods and services they supply and pay the VAT they have charged to HM Revenue & Customs (HMRC). They can also claim back any VAT they have paid on their business expenses.

What does VAT stand for?

VAT is an acronym for Value Added Tax and was introduced in the UK in 1973.

What is the UK VAT rate?

There are 3 UK VAT rates, each depending on the goods or services being provided. The table below sets out these rates and what they generally apply to.

VAT does not apply to all sales; some are exempt from or outside its scope. For example, insurance, health care, postage stamps and education are exempt. Statutory fees, goods or services bought and used outside the UK, and donations to charities, are outside the scope of UK VAT.

What is the VAT threshold in the UK? (2024/25)

You must register for VAT if your taxable turnover exceeds the VAT threshold.

• Since 1 April 2024 the VAT threshold is £90,000.
• Before 1 April 2024, this was £85,000.

Taxable turnover is all turnover generated by sales that are not VAT exempt. Even turnover on which the UK VAT rate is zero is classed as taxable turnover.

Companies who do not pass this threshold do not need to charge VAT on the sale of their goods or services. They also do not need to register with HM Revenue & Customs (HMRC).

This turnover threshold is measured in a rolling 12-month period, rather than a fixed period like the tax year. It could be any period of 12 whole months, for example, the start of June until the end of May.

Un-registered businesses whose turnover is close to the registration limit should keep an eye on this. There are strict deadlines for submitting the registration and charging VAT, once you have passed the turnover threshold.

Registering for VAT

VAT applies companies, partnerships, and sole traders.

HMRC will issue a VAT registration certificate. This will confirm the VAT number, effective date of registration and when the first VAT return is due.

Note that any business with a turnover below the threshold can choose to register for VAT. This is known as voluntary registration. Advantages of voluntarily registering for VAT include reclaiming VAT on purchases and creating a more trustworthy image for your customers.

Accounting for VAT

Once registered, a business will need to include the relevant rate of VAT on all their taxable sales. This is output tax. VAT is ultimately paid by their customers, but it is the business’ responsibility to pay this to HMRC.

Businesses can usually reclaim VAT paid on business related purchases, known as input tax. Some items are not eligible for VAT reclaims. These include entertaining costs, cars and (for unincorporated businesses) private use purchases.

How to calculate VAT

Calculating VAT is quite straightforward. To find VAT-inclusive prices, you can multiply the price excl. VAT by 1.2, thereby adding the standard 20% rate of VAT to the price. For the 5% reduced rate of VAT, multiply the price (excl. VAT) by 1.05.

To calculate VAT-exclusive prices, divide the total price (including VAT) by 1.2 for the standard (20%) rate, or by 1.05 for the reduced (5%) rate.

What is a VAT return?

VAT-registered businesses must report the amount of output tax and input tax to HMRC via a VAT Return. This is usually completed every quarter. Most VAT-registered businesses with a turnover over £90,000 must also follow the rules for Making Tax Digital (MTD) for VAT. These rules were introduced in April 2019.

What is my VAT number?

A VAT Number is a unique code that is issued to a company that is VAT-registered. This is also known as the VAT Registration Number. A VAT number is 9 digits long and will usually feature GB at the start. HMRC issues companies a VAT registration certificate that shows their VAT number.

It is very important that you check your VAT number whenever submitting VAT returns. Mistakes in your VAT return can cause delays, while HMRC may disallow your tax input claim.

How to check if a company is VAT registered

You can check whether a UK company is VAT registered using a service on the UK Government website. This service lets you check if a VAT Registration number is valid. It will also let you look up the business name and address that the number is registered against. You cannot use it to keep a record of when you have checked a UK VAT number.

VAT Penalties

VAT registration is a legal obligation. Failure to adhere to these rules can lead to penalties and, in the worst cases, a custodial sentence.

The penalty levied by HMRC for late registration is calculated as a percentage of the VAT due (output tax less input tax), from the date when a business should have registered to the date when either HMRC receive your notification, or became aware that you were required to be registered. The rate of penalty depends on how late you were in registering:

HMRC also charge surcharges if they do not receive the VAT return or full payment for the VAT due by the deadline. These surcharges can be up to 15% of the VAT outstanding at the due date. HMRC also have the power to levy penalties of up to 100% of any tax under-stated or over-claimed if a business sends inaccurate returns.

This article aims to be a quick introduction to VAT. But the reality is that the scope of VAT is far wider and can be extremely complicated.

HMRC takes VAT compliance very seriously, so businesses must account for VAT correctly. Specialist advice is highly recommended.

The UK government introduced a new VAT penalty regime in January 2023 - learn more in our blog.

Can you claim VAT back in the UK?

You may be able to reclaim VAT on goods and services that are used exclusively by your business. These goods include computers, office furniture, and transportation. You can also include third-party vendor costs (such as accountants).

You cannot reclaim VAT on goods and services intended for personal use. Nor can you claim back VAT on business entertainment costs.

Reclaiming VAT requires completion of a quarterly VAT Return. Calculate the difference between the VAT your business paid, and how much VAT the business charged during an accounting period.

The process of reclaiming VAT is complex, and there are many exceptions, exemptions and caveats to consider. We recommend discussing your requirements with a qualified business taxes expert.

What items are not subject to VAT?

Many goods and services are exempt from VAT. But there are often items within a goods or services category for which VAT is chargeable.

For example, food and drink is generally zero-rated for VAT. Exceptions to this include hot food, crisps, alcoholic drinks, confectionery and soft drinks. Many of these exceptions have exceptions of their own!

There are far too many specific items to list here. For an in-depth look at which items are exempt from VAT (or zero-rated), consult a VAT specialist.

Do charities pay VAT?

Any business that makes sales that exceed the UK VAT threshold must register for VAT. This can include charities and their trading subsidiaries. VAT registered charities must charge VAT on any standard or reduced rated goods or services.

Charities may be able to claim VAT relief on certain goods and services. They may also be able to reclaim some of that VAT from HMRC. We recommend that charities consult a tax expert to determine whether they qualify.

Learn more: VAT for charities

What about properties and VAT?

Property related transactions can cover the full gamut of VAT possibilities. They can be exempt, zero-rated, reduced-rated or standard rated.

Different rules can apply to purchases and sales, residential, commercial, or charitable buildings, construction, renovation and conversion. There can be a little flexibility with commercial property. It is important to decide on the correct approach at the outset because there are also pitfalls.

Property transactions tend to be high value. This means getting the VAT treatment wrong can be expensive.

Learn more: Land and property VAT

How to get VAT advice

VAT remains one of the least understood of all taxes, which is why we set up a specialist VAT advisory department, to help guide businesses through the complex maze of VAT legislation.

Our team helps with all areas of VAT, including:

• initial registration
• the completion and submission of VAT returns
• advice on how to correct errors and mistakes
• assessments
• control visits
• cross border transactions
• DIY house builds.