How VAT Works

VAT is a tax you pay when you buy products and services. The business adds it to the price before you pay. For example, if something costs £120 before VAT:

• At 20% VAT, you pay £144
• At 5% VAT, you pay £126
• At 0% VAT, you pay £120

UK VAT Rates – What Gets Taxed at Each Rate

The standard rate of 20% applies to most goods and services. A reduced rate of 5% is applied to certain products and services. Many essential items benefit from a 0% rate, while certain goods and services are exempt.

Standard Rate (20%)

The standard VAT rate of 20% applies to most goods and services in the UK.

The rate has been in effect since 2011, when it increased from 17.50%.

Items subject to the standard rate include:

• Consumer electronics – PCs and laptops, mobile phones, game consoles, and home appliances
• Adult clothing and accessories – Clothes, shoes, fashion accessories, and jewellery
• Home and furniture – Furniture, home decorations, and carpets.
• Services – Consulting services, legal services, accounting services
• Luxury items – Cosmetics and perfumes
• Non-essential food and drink – Alcohol, confectionery, crisps, hot takeaway food, and soft drinks

Reduced Rate (5%)

The reduced VAT rate of 5% applies to specific goods and services considered essential or socially beneficial. 

• Energy and power – Gas and electricity for household use, heating oil for residential properties, solar panels and wind turbines, ground source heat pumps
• Children and mobility – Children’s car seats and booster seats, installed mobility aids for people over 60 (e.g. grab rails, ramps, and stair lifts)
• Health and welfare products – Smoking cessation products (nicotine patches, gum), sanitary protection products, and incontinence products
• Property and construction – Residential property renovations (for properties empty 2+ years), converting buildings into residential properties, and home adaptation for disabled people.

This reduced rate helps make essential items and services more accessible while maintaining VAT recoverability for businesses.

Zero Rate (0%)

Zero-rated items are technically still VAT-taxable but at 0%. This differs from VAT-exempt items because businesses can reclaim VAT on costs related to these sales.

• Essential food and drink – Bread, fruit, vegetables, meat, fish, milk and dairy products, eggs, tea, coffee etc.
• Children’s items – Clothing and footwear for children, and school uniforms
• Health and medical – Prescription drugs and medicines dispensed by a registered pharmacist, and medical equipment for disabled people (e.g. wheelchairs and hearing aids)
• Publications and learning – Books and booklets, newspapers and magazines, maps and charts, academic journals, sheet music, and educational texts
• Building and construction – Construction of new residential buildings, and construction of buildings for charitable purposes
• Utilities – Water supplied to households and sewerage services
• Transport – Public transport fares and international freight transport
• Special categories – Exports to countries outside the UK

This zero rate helps make essential items more affordable while allowing businesses to reclaim VAT on their related costs, unlike VAT-exempt items, for which no VAT can be reclaimed.

VAT-Exempt Items

Some things don’t have VAT at all. These are different from zero-rated items because businesses can’t claim back VAT on costs related to them. These include:

• Financial services – Banking services and transactions, credit and lending services, insurance services and policies, investment management, stock and share dealings, money transfer services, and foreign exchange
• Education and training – Courses provided by eligible institutions, university tuition, vocational training by recognised bodies
• Healthcare services – Medical care by registered professionals, dental treatment, optometry services, and services provided by registered pharmacists
• Charitable activities – Admission charges to charitable events, fundraising events by charities, welfare services provided by charities, and donated goods sold by charity shops
• Postal services
• Cultural services – Museum and gallery admission (public bodies)
• Membership organisations – Professional body subscriptions, trade union subscriptions, sports club memberships (non-profit), religious organisation memberships, and community association fees

VAT on property and land transactions is complex and depends on the type of property, its use, and any elections made by the seller or landlord. For example:

• The sale of freehold land, including many commercial buildings, is generally exempt from VAT, unless the vendor has opted to tax the property
• Similarly, leasing of commercial property is normally VAT-exempt; however, if the owner has made an option to tax, VAT is charged (usually at the standard rate) but enables recovery of related input tax
• Residential rent and lettings are typically exempt from VAT

This exemption system helps keep essential services more affordable.

Products and Services Outside the Scope of VAT

Products and services that are outside the scope of VAT are fundamentally different from zero-rated or exempt items. These transactions fall entirely outside the VAT system.

• Government and statutory charges – MOT testing fees, vehicle scrappage schemes, congestion charges, bridge and tunnel tolls operated by public authorities, and statutory fees and levies
• Employment and wages – Salaries and wages, statutory redundancy payments, and compensation payments
• Charitable activities – Genuine donations where nothing is received in return, low-cost welfare services provided by charities, grant funding (when no benefits are received in return)
• International services – Services provided to businesses outside the UK (under place of supply rules), services to overseas clients, services related to land outside the UK, and international freight transport services
• Business transfers – Transfer of a business as a going concern (TOGC), share sales, and company acquisitions

For such items:

• No VAT is charged on these items
• Transactions are not reported in VAT returns
• Businesses cannot reclaim VAT on related costs

Rules for Businesses

• If a business has a taxable turnover more than the VAT registration threshold (£90,000 in 2025/26), it must register for VAT and:
• Charge output VAT on sales
• Send VAT returns to HMRC (usually quarterly)
• Keep VAT records
• Input VAT can be reclaimed if the goods or services purchased are used to make taxable supplies

The VAT liability of a business is determined by deducting the input tax from the output tax. The difference is paid to HMRC (often on a quarterly basis) if the output tax is higher than the input tax. On the other hand, the company may be eligible for a VAT refund from HMRC if the input tax is higher than the output tax.

Important Considerations for Businesses

Companies should think about whether there are any special regulations. For comprehensive and current advice on all facets of VAT for companies, please visit the official HMRC website.

Partial Exemptions

Companies that produce both taxable and VAT-free goods are referred to as “partially exempt.” For instance, a hospital gift store that offers VAT-exempt medical services in addition to taxable goods like greeting cards must figure out how much input tax can be claimed for its taxable operations. The amount of input tax that these companies can claim must be properly calculated. The computations can be intricate and frequently need for expert accounting counsel.

Digital Services

Depending on the customer’s location and whether they are a corporation or a consumer, the “place of supply” regulations for digital services might be complicated. Companies who sell digital goods or services to clients abroad need to be aware of these regulations.

Specific VAT Schemes

Businesses can simplify their VAT accounting using a number of optional schemes. These include the Cash Accounting Scheme, which allows VAT to be recorded at the time of payment rather than when it is billed, and the Flat Rate Scheme, which is intended for smaller enterprises.

VAT and Imports

Businesses may be required to pay import VAT when they bring items into the UK from outside the country. Depending on the situation, either HMRC or the shipping business may collect the VAT. As long as the products are used for taxable supplies, businesses are eligible to collect this VAT.