Value added tax (VAT) is a rate applied to most goods and services that we buy. There are three different levels of VAT – the standard rate of 20%, a reduced rate of 5% and a zero rate.
Reduced rate items (5%) include domestic fuel and power, women’s sanitary products and children’s car seats. In the zero-rated category are food (except when served in restaurants), books and newspapers, children’s clothes and public transport. A few things like betting, insurance and credit are all exempt from VAT.
In ordinary retail shops, the goods and services that we buy will already have VAT applied to their price (this is a legal requirement). However, often when you receive a quote from a business like a tradesperson or garage, VAT will not have been included and you will need to calculate this on top to work out the total amount you will have to pay (add 20% by multiplying the amount by 1.2).
Not all businesses charge VAT, the current threshold is £90,000 (from April 2024) meaning businesses taking more than that over 12 months are obliged to register with HMRC and complete a VAT return. VAT registered businesses will need to pay back the VAT that they have been charging on sales (output tax) but are eligible to deduct the VAT that they have been charged on VAT related purchases (input tax).
You can use our online VAT Calculator to calculate exactly how much VAT you will need to pay.
Further reading:
- Do I need to register for VAT?
- How do I complete my VAT return?
- How to reclaim VAT
- What is a VAT invoice?
- Find an accountant or bookkeeper
