Small business guide to VAT – what is it and how is it calculated?

You are required to register for VAT (external link) when your taxable turnover exceeds £90,000 in any 12-month period. Businesses must register within 30 days of exceeding this limit. Many businesses below the threshold register voluntarily, as it allows them to reclaim VAT on purchases and present a more credible business image. 

Businesses in certain special circumstances must also typically register, regardless of turnover. These include if you:

• Are an overseas seller (external link) making taxable supplies in the UK.
• Acquire goods worth over £90,000 (external link) from EU countries.
• Sell goods from Northern Ireland (external link) to EU consumers.
• Supply digital services to EU customers. 

You can register for VAT through HMRC’s online portal (external link). 

For more details, you can read our guide to registering for VAT.

Standard VAT items

Some of the most common VAT taxable goods and services can include: 

• Physical goods, including manufactured, imported, and retail products such as electronics, furniture, and non-basic food items.
• Professional services such as consultancy, legal advice, and marketing.
• Equipment rental and hire services, including tools, vehicles, and machinery.
• Business assets sold or transferred, such as company vehicles, furniture, equipment, land, and buildings.
• Staff sales and employee benefits provided at below market value. 

GOV.UK has a comprehensive list of VAT taxable items (external link).

VAT-exempt items

Various goods and services are exempt from VAT, including: 

• Financial services, including banking, loans, mortgages, insurance premiums, and investment management.
• Education and training services provided by accredited institutions and registered professionals.
• Healthcare services provided by registered medical professionals, such as doctors, dentists, and opticians.
• Certain residential property transactions, including sales of dwellings and long-term residential lettings.
• Charitable fundraising events and donations made to certain charitable organisations. 

You can visit GOV.UK for the full list of exemptions (external link).

VAT-registered businesses must add VAT to the prices of the taxable goods and services they sell. You collect this from customers and pay it to HMRC, typically through quarterly VAT returns. Most VAT-registered businesses must keep digital records and submit VAT returns using Making Tax Digital (MTD) software, unless exempt. For more information, you can read our guide to Making Tax Digital, or visit GOV.UK (external link). 

The VAT you charge customers is called output tax, while the VAT you pay on business purchases is called input tax (external link). The difference between these amounts determines what you owe HMRC or what they owe you as a refund.

Businesses are typically required to keep proper VAT records (external link) for at least 6 years and issue VAT invoices where needed.

Adding VAT to a price can be straightforward: multiply the price by 1.20 (for the standard 20% rate). 

For example, if your service costs £100, with VAT it becomes £100 x 1.20 = £120. To remove VAT from a VAT-inclusive price, divide by 1.20. For example, if a £120 invoice includes VAT, the net price is £120 / 1.20 = £100. 

VAT calculations are typically rounded to the nearest penny. If your product costs £19.99, and you calculate that with VAT it becomes £23.988, then the VAT price is rounded to £23.99, since you cannot account for a fraction of a penny.

VAT-registered businesses can reclaim VAT paid on legitimate business expenses, such as equipment, office supplies, and business travel. You cannot reclaim VAT on certain expenses, such as entertaining clients or items used for non-business purposes.¹ (external link)

The current VAT rates (external link) in the UK are 20% standard rate, 5% reduced rate, and 0% zero rate: 

• Standard rate (20%): most goods and services, including professional services, electronics, and clothing.
• Reduced rate (5%): mainly applies to fuel, domestic energy bills, and specific items like children’s car seats.
• Zero rate (0%): applies to good retailers, bookshops, children’s clothing, and businesses exporting goods.