VAT is a tax added to most goods and services in the UK. This guide covers the rates, the £90,000 registration threshold, and how VAT actually flows through your business, with a worked example.
Published July 2026 · Updated July 2026
VAT, or Value Added Tax, is a consumption tax added to the price of most goods and services sold in the UK. When you are VAT registered, you charge it on your sales and hand it to HMRC, so in effect you collect the tax on the government's behalf.
The key idea is that VAT is charged at each stage of the supply chain, but businesses reclaim the VAT they pay on their own purchases. The tax ultimately falls on the final consumer, who cannot reclaim it.
There are three rates. The standard rate of 20% applies to most goods and services. The reduced rate of 5% covers items such as domestic energy and children's car seats. The zero rate of 0% applies to things like most food, books and children's clothing, still VATable, but at 0%.
Some supplies are 'exempt' (for example insurance and some financial services), which is different from zero rated: you cannot reclaim VAT on costs relating to exempt sales.
Registration becomes compulsory once your taxable turnover exceeds £90,000 in any rolling 12 month period, not just a tax year. You must register within 30 days of passing it. You can also register voluntarily below the threshold.
Voluntary registration can be worth it if you mainly sell to other VAT registered businesses (who reclaim the VAT anyway) or buy a lot of VATable stock and equipment you would like to reclaim VAT on.
The VAT you charge customers is called output VAT. The VAT you pay suppliers is input VAT. Each quarter you subtract input from output and pay the difference to HMRC (or reclaim it if input is higher).
You are VAT registered and sell a service for £1,000 plus VAT:
No. Most sales are standard rated at 20%, but some are reduced rated, zero rated or exempt. The rate depends on what you sell, so it is worth checking the category of each product or service.
In some cases yes. You can usually reclaim VAT on goods bought in the four years before registration (if you still hold them) and on services in the six months before, subject to conditions.
You must still register within 30 days of exceeding the threshold. If it was a one off spike and you expect turnover to stay below £88,000, you can apply for an exception to registration.
Source: GOV.UK ↗. This glossary is written for small business owners, so definitions are simplified. Tax rates and thresholds reflect 2026/27 UK rules and change over time. Berified does not provide accounting, tax or legal advice; always check the source or a qualified adviser.