How VAT works
A plain-English guide to VAT: the 20%, 5% and 0% rates, adding and removing VAT, the £90,000 registration threshold and returns.
What is VAT?
Value Added Tax (VAT) is a tax on most goods and services sold in the UK. It is charged by VAT-registered businesses, added to the price the customer pays, and handed on to HMRC. Although businesses collect it, the cost ultimately lands on the final consumer — which is why prices for the public are normally quoted including VAT.
The three VAT rates
| Rate | Applies to |
|---|---|
| 20% standard | Most goods and services |
| 5% reduced | Domestic gas & electricity, children's car seats, some energy-saving materials |
| 0% zero | Most food, books and newspapers, children's clothes, public transport |
Adding and removing VAT — the maths
To add 20% VAT, multiply the net price by 1.2: £100 becomes £120. To remove it from a VAT-inclusive price, divide by 1.2: £120 ÷ 1.2 = £100 net, so the VAT inside is £20.
| Gross (inc. VAT) | £2,400 |
| Net = £2,400 ÷ 1.2 | £2,000 |
| VAT = £2,400 × 1/6 | £400 |
The £90,000 registration threshold
You must register for VAT when your VAT-taxable turnover passes £90,000— measured over any rolling 12 months, not your accounting year. There are two tests:
- Backward look: your last 12 months' taxable turnover went over £90,000 — register within 30 days of the end of that month
- Forward look: you expect to pass £90,000 in the next 30 days alone — register immediately
If your turnover later falls below £88,000 you can ask HMRC to cancel your registration. Businesses can also register voluntarily below the threshold — worth it if your customers are VAT-registered and you want to reclaim VAT on your costs.
VAT returns and Making Tax Digital
Registered businesses file a VAT return (usually quarterly) showing output tax charged and input tax reclaimed, and pay the difference. All VAT-registered businesses must keep digital records and file through Making Tax Digital (MTD)-compatible software.
Frequently asked questions
What is the VAT registration threshold?
You must register once your VAT-taxable turnover passes £90,000 in any rolling 12-month period, or if you expect to pass it within the next 30 days alone. The deregistration threshold is £88,000. You can also register voluntarily below the threshold.
What are the UK VAT rates?
The standard rate is 20% and covers most goods and services. The reduced rate of 5% covers things like domestic energy and children’s car seats. The zero rate (0%) covers most food, books, newspapers and children’s clothes. Some things — like insurance, education and postage stamps — are exempt entirely.
How do I add or remove VAT from a price?
To add 20% VAT, multiply the net price by 1.2. To find the VAT inside a gross price, divide by 1.2 to get the net, or multiply the gross by 1/6 to get the VAT itself. For 5% VAT, use 1.05 and 1/21.
Can I claim VAT back?
If you are VAT-registered, you reclaim the VAT you pay on business purchases (input tax) against the VAT you charge customers (output tax) on each return. You pay HMRC the difference — or receive a refund if you reclaimed more than you charged.
What is the Flat Rate Scheme?
A simplification for small businesses with turnover up to £150,000 (ex VAT): you charge customers 20% as normal but pay HMRC a fixed percentage of your gross turnover and keep the difference, instead of tracking every purchase. In exchange you generally can’t reclaim input VAT.
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