Value Added Tax (VAT) is a consumption tax levied on the sale of goods and services. It is an indirect tax (meaning it's collected by businesses on behalf of the government and ultimately paid by consumers). VAT is applied at each stage of the production and distribution process, where value is added. This includes manufacturing, wholesale, and retail.
Businesses charge VAT on their sales (output tax) and can reclaim VAT on their purchases (input tax).
VAT rates vary by country and can include standard rates, reduced rates for certain goods and services, and zero rates for essential items like food and children's clothing.
For VAT calculation accuracy, use our simple VAT calculator above.
Output tax (also known as output VAT) is the VAT a business charges on the sale of goods or services. If you're a VAT-registered business, you must add this tax to the selling price of anything you supply that’s subject to VAT.
Simply put, it's the tax you collect from your customers on behalf of the government.
For example, if you sell something for £1,000 and VAT is 20%, you’d charge £1,200. The extra £200 is your output VAT.
When you file your VAT return, you compare output tax/ output VAT (VAT you charged) with input tax (VAT you paid on business purchases). If output tax is higher, you pay the difference. If input tax is higher, you can usually reclaim the extra.
Output tax (output VAT) only applies if you’re a VAT-registered business and making taxable supplies. If you're not registered, you don’t charge VAT at all.
The standard VAT rate in the United Kingdom is 20%.
This standard VAT rate applies to most goods and services sold within the UK, including non-essential items and services. However, there are reduced applicable rates for certain goods and services.
Reduced-rate items are goods or services that are taxed at lower rates of VAT than the standard 20%.
In the UK, the reduced applicable rate is 5%, and it applies to certain items like home energy (gas and electricity), children’s car seats, mobility aids for the elderly, and some renovation work on residential property.
These items are still within the VAT system, so businesses can usually reclaim input VAT, but customers benefit from a lower tax charge.
Additionally, there are zero-rated goods–which are items that are taxable for VAT purposes, but charged at 0%.
Common examples of zero-rated goods are most food and drink for human consumption (e.g. bread, milk), children's clothes and shoes, books and newspapers (printed versions, public transport, and exports (goods sold to customers outside the UK).
However, even though you're not charging VAT on zero-rated items, you’re still eligible to reclaim VAT you paid on business expenses or business purchases related to selling those items.
Please note: Zero-rated goods are not the same as VAT-exempt goods. VAT-exempt goods and VAT-exempt services sit outside the VAT system, meaning businesses can’t reclaim VAT on related costs.
VAT-exempt goods and services are items that are not subject to VAT at all — they’re completely outside the VAT system.
This means businesses don't charge VAT on these VAT-exempt services and they also can't reclaim VAT on any business expenses related to them.
Common vat-exempt services include financial services (like insurance or bank charges), education and training (certain courses and tuition), healthcare (provided by registered professionals), fundraising by charities, and residential property transactions(renting or selling, with some exceptions).
Postage stamps are also VAT-exempt, however courier services (such as DPD, FedEx, UPS) are VAT - standard rate. This means they do charge VAT, but also means business owners can reclaim it as input VAT.
Therefore, if businesses only offer VAT-exempt services or items, business owners can’t register for VAT, and they can’t claim back any VAT on business costs.
Businesses in the UK are required to register for VAT if their taxable turnover exceeds a specific VAT threshold or if they expect their taxable turnover to exceed the threshold in the next 30 days.
Currently tis threshold is set to £90,000, therefore if your taxable turnover exceeds £90,000 (or will do in the next 30 days), you need to register for VAT.
Once registered, businesses must charge VAT on their sales and can reclaim VAT on their purchases. VAT registration thresholds are decided by HMRC, therefore it's important for each VAT-registered business to stay informed and up-to-date.
VAT can be refunded when a VAT-registered business pays more VAT on purchases (input tax) than it collects on sales (output tax). This is common during start-up periods, when investing in large assets, or when sales are mainly zero-rated, such as exports.
To claim a refund, you must keep valid VAT invoices for all eligible purchases. These invoices must clearly show the supplier’s VAT number, the amount of VAT charged, and other required details.
Refunds may also apply if VAT has been overpaid due to errors. In these cases, tax authorities will usually require valid VAT invoices to support the correction and process the refund.
If you’re reclaiming foreign VAT through schemes like the EU’s 8th or 13th Directive, your application must also include valid VAT invoices issued by suppliers in the relevant country. Without valid VAT invoices, your claim is likely to be rejected.
Simply use our online VAT calculator above by selecting the "Add VAT" tab, entering the Net amount and selecting the appropriate VAT rate, and the total price including VAT is represented by the figure under "Gross total".
However, if you'd rather do so with manual calculations, please see below:
Calculating VAT using a formula involves determining the VAT amount and the total price inclusive of VAT. Here’s how to do it:
First, multiply the net price (the price exclusive of VAT) by the VAT rate.
The formula for this is: VAT amount = Net price × VAT rate
For example, if the net price is £100 and the VAT rate is 20%, the VAT amount is:
£100 × 0.20 = £20
Or simply use our calculator above by entering the Net amount and selecting the appropriate VAT rate.
Add the VAT amount to the net price.
The formula for this is: Total price = Net price + VAT amount
Using the previous example, the total price including VAT would be:
£100 + £20 = £120
Or simply use our VAT calculator above by selecting the "Add VAT" tab, entering the Net amount and selecting the appropriate VAT rate, and the total price including VAT is represented by the figure under "Gross total".
VAT is typically calculated based on the invoice date rather than the payment date. This approach aligns with the "accrual accounting" method, which is standard for VAT accounting in the UK and many other countries. When a business issues an invoice for goods or services, it must account for the VAT at that point, regardless of when the payment is actually received.
This means that the VAT amount is determined and reported in the VAT return for the accounting period in which the invoice is issued. For instance, if an invoice is issued in January but payment is received in March, the VAT for that invoice is included in the January VAT return.
However, there is an alternative method called the "cash accounting scheme," which allows smaller businesses to calculate VAT based on payments received rather than invoices issued. This scheme can help with cash flow management, as VAT is only paid when the customer pays, and VAT on purchases is reclaimed when payments are made to suppliers. Businesses must meet certain criteria to use this scheme.
Calculating the VAT margin involves determining the VAT owed on the profit margin of goods or services, rather than the total sales price. This method is commonly used in schemes like the Margin Scheme for second-hand goods, antiques, and art in the UK. Here’s how to calculate the VAT margin:
This method ensures VAT obligations are only paid on the profit made, which is particularly useful for businesses dealing in second-hand goods where the VAT has already been paid on the original sale.
To take 20% VAT off a VAT-inclusive price (finding the VAT-exclusive price or original price), simply divide the VAT-exclusive price by 1.2.
For example, if something costs £120, that is its VAT-inclusive price. £120 divided by 1.2 gives you £100 — that’s the original price (the VAT-exclusive price/ price without VAT added), and the VAT amount is £20.
No, VAT is not always 20% in the UK. While 20% is the standard current rate/ applicable VAT rate/ VAT percentage, there are also reduced rates (like 5% for some energy and health products) and zero rates (0%) for items such as most food, children’s clothing, and books. Some goods and services are also VAT-exempt or outside the scope of VAT altogether.
To calculate the VAT you need to pay, subtract your input VAT (what you’ve paid on business purchases) from your output VAT (what you’ve charged customers).
The formula is: VAT to pay = Output VAT – Input VAT.
If the result is positive, you pay that amount to HMRC; if it's negative, you may be due a refund.
To work out 20% tax on a calculator, simply multiply the original amount by 0.20. For example, if the price is £100, do 100 × 0.20 = 20 — that’s the VAT amount equal to a VAT percentage of 20%. To get the total price including VAT, add it back: 100 + 20 = £120.
