Value Added Tax (VAT) is a consumption tax charged at each stage of the supply chain in the UK. For consumers, it's the hidden cost on top of most purchases. For businesses, it's a compliance obligation that requires careful record-keeping. Whether you're a sole trader, small business owner, or just trying to understand your bills, this guide explains UK VAT clearly — with worked examples at every step.
UK VAT Rates (2025)
| Rate | % | Examples |
|---|---|---|
| Standard rate | 20% | Most goods and services, electronics, clothing, restaurant meals |
| Reduced rate | 5% | Home energy, children's car seats, sanitary products, smoking cessation products |
| Zero rate | 0% | Most food, children's clothing, books, newspapers, prescription medicines |
| Exempt | N/A | Insurance, financial services, education, health services, postage stamps |
Important distinction: Zero-rated and exempt are not the same. Businesses selling zero-rated goods are VAT registered, can reclaim input VAT, and must still report these sales. Businesses selling only exempt goods cannot register for VAT at all and cannot reclaim input VAT.
Adding VAT to a Net Price
When a price is quoted "ex-VAT" or "net of VAT," you need to add VAT to find the gross (total) price.
Standard rate (20%): Gross = Net × 1.20
Reduced rate (5%): Gross = Net × 1.05
VAT amount only: VAT = Net × rate (0.20 or 0.05)
Example 1: Standard rate
A plumber charges £850 + VAT. What's the total bill?
VAT = £850 × 0.20 = £170
Total = £850 + £170 = £1,020
Example 2: Reduced rate
Your energy bill shows a net charge of £120. What's the VAT and gross amount?
VAT = £120 × 0.05 = £6
Total = £120 + £6 = £126
Removing VAT from a Gross Price (Working Backwards)
When a price already includes VAT and you want to find the net amount or VAT portion, divide by the VAT-inclusive multiplier.
Standard rate: Net = Gross ÷ 1.20
Standard rate: VAT = Gross ÷ 6 (same as Gross × 1/6)
Reduced rate: Net = Gross ÷ 1.05
Example 3: Extracting VAT from a gross price
A hotel receipt totals £240 inclusive of 20% VAT. What is the net price and VAT amount?
Net = £240 ÷ 1.20 = £200
VAT = £240 − £200 = £40 (or: £240 ÷ 6 = £40)
VAT Registration Threshold
Businesses in the UK must register for VAT if their VAT-taxable turnover exceeds £90,000 (as of 2024/25 — this threshold is updated periodically by HMRC). Voluntary registration is possible below this threshold, which can be beneficial if:
- You buy significant amounts of supplies with VAT (allows you to reclaim it)
- Your customers are VAT-registered businesses who can reclaim the VAT you charge
- It makes your business look more established to larger clients
However, VAT registration adds administrative burden: you must file quarterly VAT returns via Making Tax Digital (MTD)-compatible software and keep detailed records for 6 years.
Common VAT Mistakes to Avoid
- Forgetting zero-rated vs exempt: A therapist selling exempt healthcare services cannot reclaim VAT on their equipment purchases. A children's clothing retailer selling zero-rated goods can.
- Wrong rate on mixed supplies: A meal deal combining zero-rated food items with standard-rated hot food requires careful splitting of rates.
- Not keeping valid VAT invoices: To reclaim input VAT, you need a valid VAT invoice from your supplier showing their VAT number, the rate, and the amount.
- Missing the registration deadline: You have 30 days to register with HMRC once you exceed the threshold. Late registration carries penalties.
Practical Example: VAT Invoice for a Freelancer
A VAT-registered graphic designer invoices a client for a logo project:
| Item | Net | VAT (20%) | Gross |
|---|---|---|---|
| Logo design | £600.00 | £120.00 | £720.00 |
| Brand guidelines | £350.00 | £70.00 | £420.00 |
| Stock image licence | £50.00 | £10.00 | £60.00 |
| Total | £1,000.00 | £200.00 | £1,200.00 |
The designer charges the client £1,200, pays HMRC £200 in VAT, and keeps £1,000 — effectively acting as a tax collector for HMRC.
Summary
Adding VAT: multiply the net price by 1.20 (standard) or 1.05 (reduced). Removing VAT: divide the gross price by 1.20 (standard) or 1.05 (reduced), or divide by 6 for the 20% VAT portion only. Remember: zero-rated and exempt are different — only zero-rated businesses can reclaim input VAT. Use our VAT calculator above for instant, error-free results on any price.