VAT, or value added tax, is a tax on most goods and services sold in the UK. A business that is VAT registered adds VAT to its prices, collects it from customers, and pays it to HMRC. The customer carries the cost, much like a sales tax paid at the till.
The standard VAT rate is 20%.
How VAT works
VAT is charged at each step in the chain from supplier to customer, but businesses pass it along so the final customer bears the cost.
A VAT registered business deals with two kinds of VAT:
- Output VAT is the VAT it charges customers on its sales.
- Input VAT is the VAT it pays on its own purchases.
On a VAT return, the business takes the output VAT it collected and subtracts the input VAT it paid. It sends the difference to HMRC. If it paid more VAT than it collected, HMRC refunds the difference.
This is why VAT is often called a tax on the value a business adds, rather than on its total sales.
[ Infographic: Input VAT and output VAT ]
Brief: show output VAT charged on sales and input VAT paid on purchases, with the VAT return paying HMRC the difference.
Alt text: A VAT return pays HMRC the output VAT charged on sales minus the input VAT paid on purchases.
Caption: A business pays HMRC the gap between the VAT it charges and the VAT it pays.
Who pays VAT
In the end, the final customer pays VAT. A business in the middle collects it and hands it on, but it can claim back the VAT on its own costs, so the tax does not stick to it. A member of the public buying the finished product cannot claim anything back, so they carry the full cost.
The UK VAT rates
There are three rates, plus items that carry no VAT.
| Rate | Figure | Applies to |
|---|---|---|
| Standard | 20% | Most goods and services |
| Reduced | 5% | Home energy, children’s car seats |
| Zero | 0% | Most food, books, children’s clothes |
| Exempt | No VAT | Insurance, finance, health, education |
Who has to register for VAT
A business must register for VAT once its taxable turnover goes over the £90,000 registration threshold in any rolling 12 month period. It must also register if it expects to pass £90,000 in the next 30 days on its own.
A business below £90,000 can choose to register anyway. This is called voluntary registration, and it can help a firm that sells to other VAT registered businesses or wants to reclaim VAT on costs.
What a VAT registered business must do
Once registered, a business has to:
- Charge VAT at the right rate on its sales
- Give customers VAT invoices
- Keep digital records and send VAT returns under Making Tax Digital
- Pay any VAT it owes to HMRC by the deadline
VAT, sales tax and GST
VAT is similar to the sales tax used in the United States and the goods and services tax, or GST, used in countries such as Australia and Canada. All three add a tax to what people buy. The main difference is in how the tax is collected along the chain. VAT is collected in stages, while a simple sales tax is added only at the final sale.
A short history of VAT
VAT started in the UK in 1973, replacing an older purchase tax. The standard rate has moved over the years. It was 17.5% for a long spell, then rose to 20% on 4 January 2011, where it remains.
[ Chart: UK standard VAT rate over time ]
Type: line chart. Data points: 1973 at 10%, 1979 at 15%, 1991 at 17.5%, December 2008 at 15%, January 2010 at 17.5%, January 2011 at 20%.
Alt text: Line chart of the UK standard VAT rate from 1973 to today, rising from 10 percent to 20 percent.
Caption: The UK standard VAT rate since 1973.
Frequently asked questions
What does VAT stand for? VAT stands for value added tax. It is a tax on most goods and services sold in the UK.
What is the VAT rate in the UK? The standard rate is 20%. A reduced rate of 5% and a zero rate of 0% apply to some goods and services.
Who pays VAT? The final customer pays VAT. Businesses in the chain collect it and can claim back the VAT on their own costs.
Do I have to register for VAT? You must register once your taxable turnover passes £90,000 in any rolling 12 month period. Below that, registering is a choice.
What is the difference between VAT and sales tax? VAT is collected in stages along the supply chain, while a sales tax is usually added only at the final sale to the customer.
When did VAT start in the UK? VAT began in 1973. The standard rate has been 20% since 4 January 2011.