How Much is VAT in the UK?

VAT rates vary between countries and typically correspond with the cost of various products and services in that country. Rates may also vary depending on specific products and in different sectors, so business owners need to be informed and consider the added value of incorporating technology in their tax-related activities to better navigate the complexities of taxation and of course, ultimately, to ensure compliance.  

Like every country, the UK has its own rules, regulations, and requirements for VAT and its own system for determining VAT rates. Let’s take a deep dive into how much is VAT in the UK, how it works, and the implications for businesses.

Definition and Purpose of VAT in the UK

Value-added tax (VAT) is a type of consumption tax, ‎added at each step of the supply chain. It is an indirect tax paid to the government by the business and charged to the consumer as part of the purchase price. The UK government relies on VAT as a significant source of revenue, and it is added to the price of most goods and services. VAT-registered businesses are responsible for adding VAT at the correct rate to the selling price, collecting it from the consumer, keeping records, and reporting VAT as well as taxable employee benefits to the HMRC as required. If eligible, VAT-registered businesses can claim back the VAT they paid on purchases for business use and must fill out a VAT return every three months.

VAT Registration and Thresholds

The UK government determines thresholds for VAT registration and for using different VAT accounting schemes, based on taxable turnover. Businesses in the UK must register for VAT if they exceed the registration threshold of £85,000 total taxable turnover or expect to in any rolling 12-month period. Certain circumstances require registering for VAT in EU countries, such as selling goods from Northern Ireland to consumers in the EU, called distance selling, which has a threshold of total sales across the EU of more than £8,818. If VAT-registered taxable turnover goes below £83,000, businesses have the option of cancelling VAT registration. Businesses that only sell exempt goods and services cannot register for VAT and cannot reclaim VAT on business expenses or supplies.

Different VAT Rates and Exemptions in the UK

The UK government publishes guidelines for different VAT rates and classifications by type of goods or services and sector. Although the standard VAT rate applies to most goods and services, different rates depend on the type of product, and exemptions depend on meeting certain conditions. 

Standard Rate 

The standard VAT rate of 20% applies to most, but not all, taxable goods and services. 

Reduced Rate

A reduced rate of 5% is applied to goods and services such as fuel and power for domestic use (electricity and gas), energy-saving materials for home use, some mobility aids, and children’s car seats.

Zero Rate

0% VAT is applied to products considered essential to make them more affordable to the public, such as most food, books and newspapers, shoes and clothes for children, motorcycle helmets, maternity and sanitary products. Although no VAT is charged, the sale of these items must be reported on VAT returns.

Exempt Supplies

VAT-exempt items include insurance, finance and credit, healthcare and medical treatment, education and training, postage stamps or services, property transactions, and subscriptions to membership organisations. These items must be recorded but don’t have to be included in taxable turnover for VAT. 

Outside the Scope

Goods and services that are outside the VAT tax system include those bought and used outside the UK, statutory fees, goods sold as part of a hobby, such as stamps from a collection, and donations to charity. You cannot charge or reclaim VAT on out-of-scope items.

Partial Exemption

Defined as VAT-registered businesses selling goods that are taxable and exempt from VAT. These businesses can only recover VAT on purchases related to taxable supplies and cannot recover VAT for exempt supplies unless the VAT is below a certain amount.

VAT Flat Rate Scheme

A fixed-rate VAT for VAT-registered businesses that expect their taxable income to be ‎£150,000 ‎or less (excluding VAT). Under this scheme, businesses can’t reclaim VAT on goods, services, and ‎company expenses, except for certain capital assets over £2,000. ‎

Marginal VAT Scheme

VAT margin schemes tax the difference between the price paid for an item and the price sold. VAT is 16.67% on the difference. This scheme can apply to items such as second-hand goods, works of art, antiques, and collector’s items.

VAT Exemptions for Specific Industries

VAT-exempt businesses sell only VAT-exempt products or services. Such businesses cannot register for VAT, do not need to keep records or submit VAT returns, and cannot reclaim VAT on business expenses.

International VAT Rates

Goods exported outside the UK are zero-rated, including most exports from Northern Ireland to destinations outside the UK and the EU.

Recent VAT Updates and Changes in the UK

VAT rates in the UK have changed or been temporarily reduced by the government over time, and VAT-registered businesses are responsible for keeping up to date with both VAT rates and VAT thresholds. 

Since its introduction in 1973, the government has raised or lowered VAT depending on priorities, changing policies, and economic fluctuations. In January 2011, the standard VAT rate increased from 17.5% to 20%. In response to the coronavirus pandemic, the government temporarily reduced the standard VAT rate to 5% for the hospitality and tourism business between July 15, 2020, and September 30, 2021. It later introduced a 12.5% rate until March 2022, when the standard and current rate of VAT in the UK went back into effect.

The future might hold new developments and reforms in the VAT domain, such as the recent UK government mandate to replace manual entry of VAT returns in the Making Tax Digital (MTD) VAT regulations. 

Keep in mind that if VAT rates change, they must be updated immediately. This is one important reason why being current with regulations and having dedicated VAT management software is critical for all businesses.

Blue dot’s UK VAT Calculator

UK VAT-registered businesses need to be aware of their obligations and applicable VAT rates to ensure accurate reporting and compliance facing changing and often complex tax regulations. There’s an easy way to keep informed and do the math. Blue dot’s UK VAT calculator is a free online tool that can simplify the process and help businesses estimate and maximise VAT reclaim with no-hassle calculations that improve compliance with global tax rules. 

As industry experts offering innovative technology, Blue dot has got you covered across the VAT board, providing services that can help you calculate, identify and deliver any eligible and qualified VAT spend along with constantly updated country-specific tax regulations and policies. Blue dot leverages an automated AI and machine learning-powered application to support the process of VAT reclaim to ensure compliant domestic VAT posting and foreign VAT refund. And that outcome is a definite win for any business.