Understanding VAT in the UK

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What is VAT?

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VAT (Value Added Tax) is a consumption tax charged on most goods and services in the UK. It is collected by businesses on behalf of HMRC.

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What are the current VAT rates in the UK?

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Standard Rate: 20%, Reduced Rate: 5% (e.g., energy-saving products), Zero Rate: 0% (e.g., food and children’s clothing)

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What is the VAT registration threshold?

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£85,000 in taxable turnover (as of 2024). Businesses exceeding this threshold must register for VAT.

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What is the VAT deregistration threshold?

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£83,000 in taxable turnover (as of 2024). Businesses can deregister if turnover falls below this amount.

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What are taxable supplies?

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Taxable supplies are goods or services on which VAT is charged, including standard, reduced, and zero-rated items.

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What is input VAT?

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VAT paid by a business on its purchases and expenses. Businesses can reclaim input VAT if they are VAT-registered.

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What is output VAT?

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VAT charged by a business on its sales. Output VAT must be paid to HMRC.

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How is VAT liability calculated?

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VAT Liability = Output VAT - Input VAT. If output VAT exceeds input VAT, the business owes HMRC. If input VAT exceeds output VAT, the business can reclaim the difference.

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What is the basic tax point?

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The date when goods are supplied or services are completed.

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What is the actual tax point?

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The earlier of: The date of invoice issuance (if within 14 days of supply). The date payment is received (if before the supply).