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How Much is VAT in the UK?

As a small business owner, you’re probably already familiar with VAT, because you may be required to register for and collect it. But how much do you actually know about this form of “indirect taxation”? There’s a lot of information to get to grips with, but it’s important that you understand how VAT works, as it can have a serious impact on your bottom line. So, how much is VAT in the UK? Learn more about the current UK VAT rate, right here.

What is VAT?

VAT stands for Value Added Tax. It’s a form of “consumption tax” levied against the sale of goods and services in the UK. Put simply, it adds to the cost of almost everything that you buy. It’s important to note that this is a type of “indirect tax” which means that it isn’t directly collected by the government from the customer, but by businesses themselves.

What is VAT rate?

VAT rate is the amount of VAT that’s applied to goods and services, as a percentage. So, if the VAT rate is 17.5% and the price of the goods is £1,000, the total bill would be £1,175 ((1000 x 0.175) + 1000).

What are the different types of VAT rates?

There are three main UK VAT rates: standard, reduced rate, and zero rate. Here’s our simple guide to what each of these terms mean for your business:

  • Standard rate – This is the highest UK VAT rate, and the rate that most goods and services in the UK are subject to. Although most food and drink are zero-rated for VAT, there are a couple of exceptions, including alcoholic drinks, confectionary, sports drinks, and hot takeaways.

  • Reduced rate – This is a reduced rate that certain goods and services are subject to, including products to help people stop smoking and children’s car safety seats.

  • Zero rate – The zero rate applies to a range of different goods and services, including travel fares, baby/children’s clothes, books, and most food.

It’s also important to note that some goods and services are exempt from VAT, such as financial and property transactions and postage stamps. Although it might seem like zero-rated goods and VAT-exempt goods are the same thing, they aren’t. In short, zero-rated goods are items that the government could charge VAT on, but the rate is currently set at zero. Exempt items are goods that VAT isn’t charged or paid on.

What is the VAT rate in the UK?

The UK VAT rate is subject to change. You can check the current UK VAT rate on the government’s website. At the time of writing:

  • Standard VAT rate is 20%

  • Reduced VAT rate is 5%

  • Zero VAT rate is 0%

How has the UK VAT rate changed?

VAT was introduced for the first time in 1973, when it replaced the purchase tax. It’s changed substantially since it was first introduced. There are a range of reasons why the government may choose to increase or decrease the UK VAT rate, including the need to boost tax revenues or increase public spending. Initially, the UK VAT rate was charged at 10%. It rose gradually, until it hit 17.5% from 1991 to 2008. After a small dip to 15% in 2008-2009, it rose again to 17.5%, before rising to the current UK VAT rate of 20% in 2011.

Does my business need to pay VAT?

All businesses which have an annual turnover which is more than the current VAT threshold (at the time of writing, this is set at £85,000) need to register for VAT and file a quarterly VAT return. Once you’re registered, you’ll need to start charging VAT on required products and paying VAT on products/services you purchase.

How do you charge VAT on payments?

It’s important to charge VAT at the point of sale. This may mean that you need to create a VAT invoice (a type of invoice that you need to use if you or your customers are VAT-registered). In addition to the entries on a standard invoice, you need to include:

  • VAT registration number

  • Tax point (or “time of supply”)

  • Total amount excluding VAT

  • Total amount of VAT

  • VAT rate charged per-item (plus notes for any exempt items)

If you’re using GoCardless, remember that we process payments for the full amount charged to the customer. We don’t add VAT on top of this, so if you need to charge your customers for VAT, this should be incorporated into the amount that you’re creating payments for. You can learn more in our Transactions and fees FAQs.

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GoCardless (company registration number 07495895) is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, registration number 597190, for the provision of payment services. GoCardless SAS (23-25 Avenue Mac-Mahon, Paris, 75017, France), an affiliate of GoCardless Ltd (company registration number 834 422 180, R.C.S. PARIS), is authorised by the ACPR (French Prudential Supervision and Resolution Authority), Bank Code (CIB) 17118, for the provision of payment services.