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Indirect tax on consumer spending, charged on most goods and services supplied within the UK, borne by the final customer, collected by businesses on behalf of HMRC.
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VAT Type
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VAT Rate
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Standard
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20 %
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Reduced
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5 %
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Zero
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0 %
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Exempt
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-
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VAT Rates in the UK
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Standard Rate
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20%
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(20/120 of gross price).
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Reduced Rate
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5%
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Applies to domestic/charity fuel/power, children’s car seats, and certain residential improvements.
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Zero Rate
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0%
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Covers basic food (excl. luxury/catering), water/sewerage, books/newspapers, children’s clothing/footwear, and protective boots/helmets.
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VAT is calculated as a percentage of the net price (before VAT).
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Own Use/Gifts:
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VAT based on recipient's price for identical item.
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Temporary Use
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VAT calculated on depreciation value during the usage period.
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Supplies to Connected Persons Below Market Value:
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VAT is based on market value, not the reduced price.
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Tax should be charged at each stage of production and distribution, but borne by the final customer of the product.
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Supply of Goods (VAT Purposes)
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Requires ownership transfer + consideration. Includes business asset gifts (excl. samples/£50 gifts) and private use of goods.
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Supplies of Services
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Non-goods supply for consideration. Includes hiring goods, business use of reclaimed input tax goods/services. Excludes gift services and private car use.
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Self Supply
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Taxable person supplies goods/services to themselves (e.g., manufacturer using own product). Input tax not reclaimable.
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VAT is calculated on the actual amount paid after discounts. If a discount is applied at the time of payment, VAT is reduced accordingly, ensuring it is only paid on the discounted price.
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VAT Record-Keeping
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All VAT records must be retained for 6 years (electronic or physical). Required records include:
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• Business/accounting records.
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• VAT account.
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• Copies of tax invoices issued/received .
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• Import/export documents.
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Net input and output tax is paid to the government (HMRC).
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Gross Amount =
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Net Amount + VAT
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• *'Gross' amount is the value of the invoice including VAT.*
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• *'Net' amount is the value of the invoice before adding VAT.
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VAT-free goods/services include:
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Building sales/leases (excl. new), insurance, financial services, Royal Mail, betting, health, burial, non-profit sports, charity fundraising, education, cultural services, unrecoverable input VAT supplies, investment gold, and cost-sharing services.
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VAT on Bad Debts
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• Cash Accounting: VAT recorded on payment.
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• Accrual Accounting: VAT recorded before payment; risk if unpaid.
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Claim VAT if:
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• VAT paid to HMRC.
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• Debt written off.
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• 6 months overdue.
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• Claim within 4 years, 6 months.
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If unpaid to the supplier within 6 months, repay input VAT to HMRC.
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