What Is VAT? A Clear Guide to Value-Added Tax in 2025
- Published: 15 April 2025
- 9 min read
- Tax & VAT
Rodney Wong
Author
Rodney supports customers in the UK in understanding the details and benefits of our products and services, helping them see how technology can transform their business. Passionate about the impact of the written word, he translates tech topics into clear, relevant, and practical insights, inspiring entrepreneurs to bring their ideas to life.
Yinghua Luo
Reviewer
Yin Luo is our Operations Manager based in the UK. She keeps our UK team running like a well-oiled machine and ensures our content resonates with our British audience. Before moving to operations, Yin had over 10 years of accounting experience and is an ACCA-qualified accountant. In her current role, she is our go-to expert for making complex topics easy to understand. Yin carefully reviews our UK-focused articles, ensuring they are accurate, relevant, and packed with actionable advice to help your business thrive on this side of the pond.
Value-added tax (VAT) is a tax charged on most goods and services at each stage of production and distribution. It is collected by businesses and ultimately paid by consumers as part of the price. In this article, you’ll learn what VAT is, how it operates, its rates, and its significance for both businesses and consumers.
Key Takeaways
- VAT is a consumption tax levied on goods and services at each supply chain stage, significantly affecting pricing and consumption patterns.
- Under the UK government, the standard VAT rate is 20%, with reduced rates and zero rates applied to essential goods, influencing affordability for consumers.
- Businesses must register for VAT if their taxable turnover exceeds £90,000 for the last 12 months, maintaining compliance with meticulous record-keeping and timely tax submissions to avoid penalties.
What Is VAT?
VAT, or value-added tax, is a consumption tax levied on goods and services at each stage of the supply chain. Introduced in the UK VAT through the Finance Act of 1972 and taking effect on April 1, 1973, it replaced the previous Purchase Tax as part of the UK’s entry into the European Economic Community.
This tax applies to almost all goods or services sold in the UK, impacting the final price that consumers pay. Unlike a sales tax, VAT is an indirect tax, meaning it is ultimately borne by the end user, although it is collected and remitted by businesses, including charged VAT.
Osome simplifies VAT compliance with automated registration, filing, and reporting, ensuring businesses stay compliant effortlessly. Whether you're a UK business owner or an ecommerce seller, our professional team helps you navigate VAT regulations with ease.
While businesses must account for and remit VAT, consumers typically see VAT-inclusive prices. However, VAT details are often available on receipts, making the tax component visible. Despite this, VAT significantly influences the economy by affecting pricing and consumption patterns.
How Much Is VAT in the UK?
In the UK, the standard VAT rate is currently set at 20%, a rate that has been in place since January 4, 2011. This rate applies to most goods and services, from electronics to clothing. Additionally, there is a reduced UK VAT rate of 5%, which applies to specific items such as children’s car seats and home energy. This reduced rate aims to make essential goods more affordable, particularly for families and households.
There are also certain goods and services that qualify for a zero VAT rate, meaning no VAT is charged on these items. Notable examples of VAT-exempt supplies include food items and children’s clothing, which are considered essential for daily living. By not applying VAT to these zero-rated products, the UK government aims to reduce the financial burden on consumers for these necessities.
Mistakes in VAT application can lead to compliance issues and financial penalties, making it essential to stay informed about the current VAT rates and their applicable categories.
Understanding these rates is crucial for businesses to ensure they apply the correct VAT rate to their goods or services.
How Does VAT Work?
VAT operates as a tax on the value added at each stage of the production and distribution process. When a business is VAT-registered, it must charge value-added tax on its sales (output tax) and can reclaim VAT on its purchases (input tax). The difference between the VAT charged on sales and the VAT paid on purchases is then remitted to HM Revenue & Customs (HMRC).
If a business charges more VAT on its sales than it pays on its purchases, it must pay the excess to Her Majesty's Revenue & Customs. Conversely, if the business pays more VAT on purchases than it collects on sales, it can reclaim the difference. This reclaim process helps prevent the tax from becoming a financial burden on businesses, ensuring that VAT is ultimately paid by the end consumer.
For consumers, VAT is included in the final sales price of goods and services, meaning they bear the cost of the tax without directly interacting with the VAT system.
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The VAT Threshold in the UK
In the UK, businesses must register for UK VAT if their taxable sales or turnover exceeds the VAT threshold in the prior 12 months, which is currently set at £90,000 for the 2024/25 financial year. This means that businesses with a turnover above this threshold are required to charge VAT on their goods or services, collect it from their customers, and remit it to HM Revenue & Customs.
Businesses with turnover below this threshold can choose to register for VAT voluntarily, which allows them to potentially reduce overall costs. However, businesses that supply exclusively VAT-exempt products do not need to register, irrespective of their turnover.
How To Register for VAT?
Registering for VAT involves obtaining a VAT number, a unique 9-digit code issued by HMRC. Once registered, businesses receive a VAT registration certificate that confirms their VAT number, the effective date of registration, and the due date for their first VAT return.
While businesses below the VAT threshold can also choose to register voluntarily as a VAT-registered business, this decision comes with benefits such as the ability to reclaim VAT on purchases and enhancing business credibility.
Step 🚀 | Details 📄 |
|---|---|
| 🏢Determine Eligibility | Required if turnover > £90,000 for the past 12 months (as of 2024). Voluntary registration allowed below the threshold. |
| 🌍 Choose Registration Method | Online registration via HMRC website (most common). Paper form VAT1 for special cases (e.g., EU businesses). |
| 📝 Prepare Required Information | Business details (name, address, UTR number). Estimated taxable turnover and business activities. |
| 📤 Submit Application | Apply through the Government Gateway account. Processing takes up to 30 days (longer in complex cases). |
| 📜 Receive VAT Certificate | Includes VAT number, start date, and filing deadlines. Must charge VAT from the effective date. |
| 🛒 Comply with VAT Obligations | File VAT returns (quarterly or annually). Keep records for at least 6 years. |
VAT registration is accessible and straightforward, as it can be completed online via the HMRC website.
VAT Responsibilities for Businesses
Once registered, businesses have several responsibilities to ensure compliance with VAT regulations. These include charging VAT on sales, submitting regular VAT returns, and maintaining accurate records of all VAT transactions. VAT returns must be submitted to HMRC within one month and seven days after the end of each accounting period.
Accurate record-keeping is essential for VAT-registered businesses. Detailed records of both output tax and input tax are necessary to meet reporting obligations. VAT invoices, including the supplier’s VAT registration number and a unique invoice number, are fundamental to these records. More details on the VAT invoice requirements can be found on the official website.
Various VAT schemes are available, allowing businesses to select the one that best suits their needs, impacting how they calculate and report VAT.
How To Reclaim VAT?
Reclaiming VAT allows VAT-registered businesses to recover the tax paid on business-related purchases. Businesses must keep all invoices from VAT-registered suppliers and ensure they meet HMRC’s requirements. A proper tax invoice is essential for VAT recovery, as preliminary requests do not qualify.
Businesses can reclaim VAT on goods and services used exclusively for business operations, such as office supplies and equipment. However, VAT on items intended for personal use or business entertainment costs cannot be reclaimed.
VAT can be reclaimed on services bought that are exclusively used for business activities, such as accounting or marketing services.
Given the complexity of VAT reclaims, consulting a qualified tax expert is advisable to avoid errors and ensure the accurate processing of eligible claims. If a business has paid more VAT than it has collected, it can receive a repayment from HMRC as a form of VAT relief.
VAT on Imports and Exports
VAT on imports and exports is particularly complex post-Brexit. Imported goods are subject to VAT based on their value upon entry into the UK, charged at the same standard rate as domestic purchases. To recover import VAT, businesses must present specific documentation at customs, like the Import VAT certificate.
Post-Brexit rules for importing goods from European Union (EU) countries and other countries have changed, necessitating greater diligence in customs declarations. The import VAT threshold for EU goods brought into the UK is now above £135, and the UK VAT threshold has been a significant factor in these changes.
Exports to EU countries benefit from a zero percent VAT rate, helping businesses maintain profitability by adhering to VAT exemption rules. Northern Ireland follows specific VAT regulations to avoid customs checks with EU countries like the Republic of Ireland, ensuring seamless trade.
The essential VAT guide for SMEs in the UK
We covered all you need to know about VAT: VAT rates, registration for VAT, and the best VAT schemes for your business in the UK.
VAT Exemptions and Zero-Rated Goods
Certain goods or services are exempt from VAT, meaning businesses that supply these items do not need to charge VAT. Examples of these VAT-exempt supplies include:
- Postage stamps
- Financial services
- Specific educational services provided by eligible institutions
- Health care and medical treatments from registered institutions
Certain property transactions also receive special VAT treatment, particularly when involving new residential builds or commercial real estate. Residential property conversions, for example, may qualify for reduced or zero VAT rates depending on the scope of the renovation and the end use of the property.
Zero-rated products are taxable at 0%, meaning no VAT is charged, but businesses can reclaim VAT on related purchases. Most food items and children’s clothing fall under this category, with exceptions like hot food and soft drinks. Passenger transport services for vehicles carrying more than ten people are generally zero-rated.
Understanding these VAT-exempt supplies and zero-rated goods is crucial for businesses to apply the correct VAT treatment and ensure compliance with VAT regulations.
VAT Penalties and Compliance
Non-compliance with VAT obligations can result in substantial penalties and interest charges. Penalties for late VAT registration can be up to 15% of the VAT due, depending on the number of months delayed. Inaccuracies in VAT returns, such as understating tax liabilities or over-claiming, can incur penalties up to 100% of the unpaid tax, depending on the nature of the error.
How Can Osome Help Stay Compliant?
Osome supports small businesses in managing their VAT responsibilities effectively. Clients can access expert guidance through live chat, with responses typically within 24 hours. This timely assistance helps resolve VAT-related queries quickly, enhancing compliance.
Osome helps small businesses optimise their tax processes, reduce penalty risks, and ensure accurate VAT reporting. Leveraging Osome’s expertise allows businesses to focus on growth while remaining compliant with VAT regulations.
Summary
Understanding and complying with VAT regulations is crucial for businesses operating in the UK. This guide has covered the essentials of VAT, including its rates, registration process, and responsibilities. By staying informed and adhering to these regulations, businesses can avoid penalties and ensure smooth operations.
Staying updated with VAT changes and seeking expert guidance when needed will help businesses navigate the complexities of VAT.
Rodney supports customers in the UK in understanding the details and benefits of our products and services, helping them see how technology can transform their business. Passionate about the impact of the written word, he translates tech topics into clear, relevant, and practical insights, inspiring entrepreneurs to bring their ideas to life.
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FAQ
What is VAT in the UK?
VAT, or Value Added Tax, is a tax applied to most goods and services in the UK, with the cost ultimately borne by the end consumer.
Is VAT still 20% in the UK?
The standard VAT rate in the UK is 20%, while a reduced VAT rate of 5% applies to specific items, and most food and children's clothing are zero-rated at 0%.
How does a business register for VAT?
To register for VAT, a business must complete the process online via the HMRC website, after which it will receive a VAT number and a registration certificate detailing its registration and first VAT return due date.
Is the first £85,000 VAT-free in the UK?
In the UK, businesses with a taxable turnover below £90,000 in the prior 12 months are not required to register for VAT. However, once their rolling 12-month taxable turnover exceeds this threshold, VAT registration becomes mandatory, meaning they must begin charging and paying VAT.
What are the penalties for late VAT registration?
Late VAT registration can result in penalties of up to 15% depending on the months of delay, and failure to submit accurate VAT returns may incur fines of up to 100% of the unpaid tax depending on the nature of the error. It is crucial for businesses to comply promptly to avoid significant financial repercussions.
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