WHAT IS VAT?

VAT (V.A.T) or value added tax is a tax levied on most goods and services provided by VAT registered businesses. The UK’s standard rate of VAT is 20%, this rate is applied to most goods and services. VAT was added in the UK in 1973 replacing the Purchase Tax.


On 4 January 2011 the VAT rate increased from 17.5% to its current rate at 20% to help cut the deficit to the disagreement of the Labour opposition, saying it’s the “wrong tax at the wrong time”, arguing that the rise would hit the poorest.

The UK has three rates for VAT. Standard at 20%, which is also the default rate, Reduced at 5% and Zero at as the name says 0%, in addition some goods and services are exempt from VAT.

All businesses that provide taxable goods or services whose taxable turnover exceeds the threshold of £85,000 must register for VAT, though businesses may register even if under the threshold. Once registered you must charge VAT on the full sale price of the goods or services.

The registered business must then pay HMRC the VAT they had charged on their goods or service, but they may offset this with the VAT they have incurred on the goods or services they purchased that relates to their own onward taxable supplies.

HISTORICAL RATES FROM 1973

FromToStandard rate
1 April 1973July 197410.0%
July 197417 June 19798.0%
18 June 197918 March 199115.0%
19 March 199130 November 200817.5%
1 December 200831 December 200915.0%
1 January 20103 January 201117.5%
4 January 2011Present20.0%

WHAT IS ZERO RATED VAT?

As the name suggests, VAT is charged at 0%. Although no VAT is charged on the goods or services, the sale still has to be recorded and reported on VAT returns, 0% VAT applies to some items like food and drink, books and children’s clothes under the age of 14.

WHAT DOES VAT EXEMPT MEAN?

Some goods and services are VAT exempt, these are in the public interest like health services and postage stamps. If you sell goods or services that is VAT exempt then you do not charge VAT to your customers, and if you buy any VAT exempt goods then there will be no VAT to reclaim. If your sales are all VAT exempt then you do not need to register for VAT.